Finance Expert Answers & Study Resources

True/False 1.A security's intrinsic value is the price that reflects investors' estimates of the value of the cash flows they expect to receive in the future. a.True b.False 2.In an efficient capital market, security prices fully reflect the knowledge and expectations of all investors at a particular point in time. a.True b.False 3.If market prices reflect all.

  26.If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero. a.True b.False 27.The expected return of the market portfolio is equal to the market risk premium. a.True b.False 28.If you were to completely diversify your portfolio by.

  6.The normal distribution is completely described by its mean and standard deviation where 50 per cent of the distribution's probability is less than the mean and 50 per cent greater than the mean. a.True b.False 7.The variance is denominated in squared units, whereas the standard deviation is denominated in the same units as.

  36.Which ONE of the following statements is true about secondary markets? a.The ordinary shares of large companies often rely on word-of-count to find interested buyers. b.Brokers bring buyers and sellers together to earn a fee. c.The presence of active brokers increases market inefficiency. d.A specialist is a specific location on the floor of a.

  51.Bond price: Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Round to the nearest dollar.) a.$951 b.$882 c.$1,033 d.$1,195 52.Zero coupon.

84. How do the secondary markets for securities differ across the four types of markets?     .

  6.For investors, the function of secondary markets is to provide marketability for the shares of securities they own at a fair price. a.True b.False 7.Secondary market transactions in Australia mostly take place over the counter and not in exchanges. a.True b.False 8.In terms of total volume of activity and total capitalisation of the companies listed, the.

  21.Preference dividend payments are fixed obligations of the company, similar to the interest payments on corporate bonds. a.True b.False 22.The market considers preference shares to be a debt security because the dividend payment is a fixed financial obligation and has credit ratings like bonds. a.True b.False 23.Valuation of ordinary and preference shares is done using a.

  31.The market risk-premium is equal to the expected return on the market less the risk-free rate of return. a.True b.False 32.Given the historical information in the chapter, the beta of a small share should be greater than the beta of a corporate bond. a.True b.False 33.Complete diversification means that the portfolio is no longer subject to.

  16.The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. a.True b.False 17.Interest rate risk is the risk that bond prices will fluctuate as interest rate changes. a.True b.False 18.As interest rates fall, the prices of bonds.

  76.Which ONE of the following statements is true? a.The longer the maturity of a security, the greater its interest rate risk. b.If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. c.The real rate of interest varies with the business cycle, with the lowest rates seen.

  16.The opening price of a share equals the closing price of the share the trading day before. a. True b. False 17.A fully franked dividend means the investor is not required to pay income tax on the earnings. a. True b. False 18.A dividend yield is the dividend payout divided by its price. a. True b. False 19.Legally, ordinary.

  76.Non-constant growth: Stag Company will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of.

  11.In order for the total return of a share to be equal to -100 per cent, the income return component for that share must be zero. a.True b.False 12.Robert paid $100 for a share one year ago. The total return on the share was 10 per cent. Therefore, the share must be selling.

  71.Effective annual yield: Stanley Hart invested in a state government bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? a.13.4% b.6.81% c.6.70% d.None of the above 72.Which one of the following statements is NOT true? a.Interest rate risk is.

  26.A fast growing company will pay constant dividends over time. a.True b.False 27.The constant-growth share has dividends growing at a constant rate over time. a.True b.False 28.The constant-growth dividend model tells us that the current price of a share is the next period divided by the difference between the discount rate and the dividend growth rate. a.True b.False 29.Whenever.

  11.Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes. a.True b.False 12.Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity. a.True b.False 13.Zero coupon bonds sell well above their par value because they.

  31.With semi-strong form market efficiency: a.the price of a security in the market reflects all public information only. b.it would be possible to earn abnormally high returns by trading on public information. c.investors who have access to inside or private information will be unable to earn abnormal returns. d.None of the above. 32.Which one of.

  66.Zero growth: DirtBam Company sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The company does not expect any change in its sales or earnings in the next several years. The share is currently selling at $46.88. If the required rate of return.

  61.Yield to maturity: Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.) a.10.4% b.9.5% c.8.4% d.7.5% 62.Yield to maturity: Jane Almeda is interested in.

  56.Which one of the following statements is NOT true about zero-growth shares? a.Dividend stays constant over time. b.The cash flow pattern resembles a perpetuity with a constant cash flow. c.Dividend payments are zero. d.There is no growth in dividends over time. 57.The constant-growth dividend model will provide invalid solutions when: a.the growth rate of the share.

  21.Bonds with a call provision sell at lower market yields than comparable noncallable bonds. a.True b.False 22.The risk that the lender may not receive payments as promised is called default risk. a.True b.False 23.Australian government securities do not have any default risk and are the best proxy measure for the risk-free rate. a.True b.False 24.Ascending or normal yield curves.

85. Why are investors and managers concerned about market efficiency?     .

  36.Julio purchased a share one year ago for $27. The share is now worth $32, and the total return to Julio for owning the share was 37 per cent. What is the dollar amount of dividends that he received for owning the share during the year? a.$4 b.$5 c.$6 d.$7 37.Francis purchased a share one.

  61.Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? a.0.028025 b.0.217327 c.0.359100 d.0.993094 62.Batman Stock has exhibited a standard deviation in share returns of 0.5, whereas Superman Stock.

  51.If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean? a.95.00% b.96.25% c.97.50% d.98.75% 52.Niles is making an investment with an expected return of 12 per cent. If the standard deviation of the return is 4.5 per cent,.

  66.Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? a.7.6% b.8.6% c.9.6% d.10.6% 67.Realised yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is.

  66.A portfolio with a level of systematic risk the same as that of the market has a beta that is a.equal to zero. b.equal to one. c.less than the beta of the risk-free asset. d.less than zero. 67.The beta of Elsenore, Ltd., share is 1.6, whereas the risk-free rate of return is 8 per cent..

  41.Which one of the following statements is NOT true about brokered markets? a.Brokers bring buyers and sellers together to earn a fee, called a commission. b.Brokers' extensive contacts provide them with a pool of price information that individual investors could not economically duplicate themselves. c.Investors have an incentive to hire a broker because.

  46.Bond price: Your friend recommends that you invest in a three-year bond issued by Trimer Ltd that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Round to the nearest dollar.) a.$1,024 b.$979 c.$886 d.$1,107 47.Bond price: Kevin Rogers is interested in.

  56.If a bond's coupon rate is equal to the market rate, then the bond will sell a.at a price equal to its face value. b.at a price greater than its face value. c.at a price less than its face value. d.None of the above are true. 57.Which one of the following statements is NOT true? a.The.

True/False 1.Equity securities are certificates of ownership of a company. a.True b.False 2.Households are the largest investors in equity securities. a.True b.False 3.Superannuation funds are the largest institutional investors in equities. a.True b.False 4.Companies raise capital in secondary markets by issuing new securities. a.True b.False 5.An active secondary market for debt or equity securities makes raising new capital less expensive for companies. a.True b.False   .

  71.Constant growth: Priority Shift Ltd is expected to grow at a constant rate of 9 percent. If the company’s next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this share? (Round to the nearest percent.) a.16% b.17% c.20% d.21% 72.Constant growth: A company is growing at.

Essay Questions 83. Discuss the significance of an active secondary market to both issuers of securities and to investors.     .

84. What economic factors affect the shape of the yield curve? Explain.     .

Essay Questions 81. Under what economic conditions would investors demand floating rate bonds? 82. What is the marketability premium? Why should an issuing company consider paying this premium?     .

  21.Utilising the fact that two or more asset values do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification. a.True b.False 22.If you are trying to determine whether to purchase Security A or Security B as the only holding.

Essay Questions 73. Explain the difference between systematic and nonsystematic risk. 74. If you were to regress the historical returns of a share on the historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta.

  26.The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. a.True b.False 27.In an efficient capital market, a.security prices fully reflect the knowledge and expectations of all investors at a particular.

  16.The appropriate measure of risk for a diversified portfolio is beta. a.True b.False 17.The coefficient of variation divides the variance of the returns of an asset by the expected return of that asset. a.True b.False 18.The coefficient of variation is a good measure of the amount of risk that an asset will contribute to a diversified.

  36.Which one of the following statements about vanilla bonds is NOT true? a.They have no special provisions. b.The face value, or par value, for most corporate bonds is $1,000. c.Coupon payments are usually made quarterly. d.The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. 37.Which ONE of.

  61.PV of dividends: Terry’s Ltd is a fast growing technology company that paid a $1.25 dividend last week. The company’s expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth.

83. Why does the default risk premium vary over the business cycle?     .

  6.Public share markets in developed countries like Australia have strong-form of market efficiency. a.True b.False 7.The largest investors in corporate bonds are life insurance companies and superannuation funds. a.True b.False 8.Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. a.True b.False 9.A thin market for a security implies a high frequency of.

  31.Failure to pay a preference dividend signals to the market that the company is in serious financial trouble. a.True b.False 32.Preference shares with no fixed maturity can be valued as a perpetuity. a.True b.False 33.The bond valuation model can be used to value perpetual preference shares. a.True b.False 34.The largest holders of equity securities are: a.managed funds. b.superannuation funds. c.foreign investors. d.households. 35.Which ONE.

  41.In calculating the current price of a bond paying semiannual coupons, one needs to a.use double the number of payments. b.use half the annual coupon. c.use half the annual rate as the discount rate. d.All of the above need to be done. 42.Which one of the following statements about zero coupon bonds is NOT true? a.Zero.

  51.Preference shares are sometimes regarded as a debt security because: a.legally preference shares are a debt security. b.preference share dividend payments like bond interest payments are considered fixed obligations for the company. c.preference dividends are paid out of before-tax income just like interest payments on bonds. d.preference shareholders receive a residual value and not.

  46.If a company has paid no tax on a dividend, the Australian Financial Review will note what next to the value? a.the letter f. b.the letter p. c.the letter n. d.none of the above. 47.Which one of the following statements is NOT true about ordinary shares? a.Ordinary shareholders have the right to vote on the selection.

  11.For a commission fee less than the cost of direct search, dealers give investors an incentive to make use of the information by hiring them as brokers. a.True b.False 12.A broker market eliminates the need for time-consuming search for a fair deal by buying and selling immediately from their inventory of securities. a.True b.False 13.The ASX.

  56.You have invested 40 per cent of your portfolio in an investment with an expected return of 12 per cent and 60 per cent of your portfolio in an investment with an expected return of 20 per cent. What is the expected return of your portfolio? a.15.2% b.16.0% c.16.8% d.17.6% 57.You have invested 20 per.