You have the choice of two equally risk annuities, each ...



You have the choice of two equally risk annuities, each paying 5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? A) The annuity due B) The ordinary annuity C)Since we do not know the interest rate, we cannot find the value of the annuities and hence cannot tell which is better D)Either one because they have the same present value

2. Which of the following investments has the highest effective annual return [EAR]? Assume all CDs are of equal risk. A) A bank CD that pays 8 percent interest compounded quarterly B)A bank CD that pays 8 percent compounded monthly C) A bank CD that pays 8.25 % annually D) A bank CD that pays 8 % compounded semiannually.

3. A corporate coup bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements in most correct? A)An investor with a required rate of return of 10% will value the bond at more than $ 1,000 B)An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss. C)       An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%. D)If the bond’s market price is $900, then the annual interest payments on the bond will be $ 81.

4. Emery Inc. has a beta equal to 1.5 and a required return of 14 % based on the CAPM. If the risk free rate of return is 2%, the expected return on the market portfolio is _______________. A) 10% B)9% C) 8% D)6%

5. Investment A has an expected rate of return of 15 % per year, while investment B has an expected rate of return of 12 % per year. A rational investor will choose _________. A) Investment A because of the higher expected return B)Investment B because a lower return means a lower risk C)Investment A if A and B are of equal risk D)Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

6. Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time would be to A) Invest in long-term bonds to reduce interest rate risk B) Invest in short-term bonds to reduce interest rate risk C) Buy only junk bonds which have higher interest rates D) Invest in long-term bonds to lock in a bond position for when interest rates increase in the future.

7. CCT, Inc. expects its current annual $3 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 15% is _______ A) $4.50 B) $3.53 C)$20.00 D)$45.00

8. Which of the following bond provisions will make a bond more desirable to investors, other things being equal? A)The bond is convertible B) The bond is callable C)The coupon rate is lower D) The bond is subordinated

9. Using the constant growth dividend valuation model and assuming dividends will grow at a constant rate forever; the increase in the value of the stock each year should be equal to ______ A) Growth rate in dividends B) Required return on the stock C)Dividend yield plus the capital gains yield D)Dividend yield

10. SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic value [to the nearest dollar] of an SWH Corporation bond on January 1, 2008 to an investor with a required return of 6%? A)       $888 B) $925 C)$916 D)$947

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download