FIN432 Investments



FIN352 InvestmentsFinal exam preparatory questions and answers to end of the slides questions1. High P/E ratios are typically associated with stocks that display:LISTNUM ParaNumbers1 \l 2 \s 1below-average risk.LISTNUM ParaNumbers1 \l 2below-average dividend payout ratios. *LISTNUM ParaNumbers1 \l 2below-average historical returns.LISTNUM ParaNumbers1 \l 2below-average historical EPS growth.2 A retention rate of 75% and a ROE of 16% implies sustainable growth of:LISTNUM ParaNumbers1 \l 2 \s 16.7%.LISTNUM ParaNumbers1 \l 212%. *LISTNUM ParaNumbers1 \l 275%.LISTNUM ParaNumbers1 \l 260%.Solution: Sustainable growth = Retention × ROE = 0.60 × 16% = 12%3 According to the PEG ratio rule-of-thumb, if PEG ??1, then a stocka.may be worthy of investment attention and possible purchase. *b.is definitely worthy of investment attention, and may represent a very attractive investment.c.is apt to represent an extraordinarily attractive investment opportunity.d.none of these.4. "Open interest" is the number of option contracts:LISTNUM 1 \l 2 \s 1bought during a given day of trading.LISTNUM 1 \l 2sold during a give day of trading.LISTNUM 1 \l 2created during a given day of trading.LISTNUM 1 \l 2none of these. *5. Out-of-the-money call options have an exercise price that:LISTNUM 1 \l 2 \s 1exceeds the current market price of the underlying common stock. *LISTNUM 1 \l 2exceeds the strike price.LISTNUM 1 \l 2is less than the current market price of the underlying common stock.LISTNUM 1 \l 2is less than the strike price.59. The writer of a put option is said to have a:LISTNUM 1 \l 2 \s 1long position.>LISTNUM 1 \l 2short position.LISTNUM 1 \l 2covered position.LISTNUM 1 \l 2uncovered position.7. An investor bought one ABC $25 (exercise price is $25) call contract for a premium of $5 per share. At the maturity (expiration), ABC stock price is $30. Which is the net profit/loss of this investment?a) $500b) $0 *c) -$500d) $1008. An investor sold one ABC $25 (exercise price is $25) call contract for a premium of $5 per share. At the maturity (expiration), ABC stock price is $40. Which is the net profit/loss of this investment?a) $1000b) $0 c) -$1000 *d) -$5009. In top-down, fundamental analysis, the first step is always to analyze:a. the economy *b. the industryc. the companyd. the particular security10. EPS are of higher quality if:a. the company is a blue chip.b. the auditor's reputation is high.c. they were derived using conservative principles. *d. FASB has approved them.11. On a company’s balance sheet, shareholder’s equity is nearly always described by its?a. Book value *b. Market valuec. Current valued. Stock value12. Which of the following represents the rate at which a company can grow from internal sources?a.return on assetsb.sustainable growth rate *c.adjusted EPSd.return on equity13. If the dividend growth rate increases for a firm, its P/E will ---------, other things the same.a.increase *b.stay the samec.decreased.increase or decrease but not stay the sameFor adequately diversified common stock portfolios, market effects often account for -------- percent and more of the variability of the portfolio’s return.60708090 *Which of the following is TRUE regarding the risk premium? The risk premiuma. must reflect all the uncertainty involved in the asset. *b. does not apply to low beta stocks.c. is directly related to changes in the interest rate.d. reflects only the financial risk of a security.If security markets are totally efficient, the best common stock strategy to take is:an asset allocation approach.the modern portfolio theory.an active strategy.a passive strategy. *The central focus of a security analyst’s job is to:ascertain the accuracy of financial statements of selected companies.find growth stocks.forecast a specific company’s return. *determine the market demand for a specific company’s stock.18.An analyst employed by a pension fund to search for stocks for the fund to invest in would be referred to as:a.a sell-side analyst.b.a buy-side analyst. *c.an institutional analyst.d.a money manager.19.Which of the following statements regarding defensive stocks is true?They are often expected to have above-average future growth.They often have high P/E multiples.They are expected to be adversely affected by high interest rates.They often produce necessary items such as food and prescription drugs.20.Historically, sell-side equity research has typically been _________to the target company?a.very unfavorableb.unfavorablec.favorable *d.neutral21.____________ funds are especially popular with momentum investors.a.Index.b.Managedc.Globald.Sector *22.Put and call options on equity securities are considered:Commodity derivativesFinancial derivatives *Forward contractsFutures contracts23One important reason for the existence of derivatives is that they:a.help lower transactions costs.b.have valuable tax benefits.c.contribute to market completeness. *d.are risk-free.24. A major difference between new shares being sold by a corporation and shares sold under a call option is that:there is no profit or loss under the shares sold under the call.there is no risk to the investor with the call.there is no increase in the shares outstanding with the call. *there is no commission to the investor with the call.25.Which of the following statements is true regarding a call writer:The call writer expects the stock to move upward.The call writer expects the stock to remain the same or move down.*The call writer expects the stock to split.The call writer expects to sell the stock prior to expiration of the option.27.Options sold on exchanges are protected againsta.stock dividends and splits. *b. cash dividends.c. interest rate movements.d. inflation.28. If the price of the common stock exceeds the exercise price of a call for the holder the call is said to bea. naked.b. out of the money.c. in the money. *d. covered.29.Which of the following is true regarding option pricing:a. the longer the maturity of the option, the higher the premium. *b. the more volatile the underlying stock, the lower the premium.c. option prices are less volatile than equity prices.d. the shorter the maturity of the option, the lower the premium.30.A stock is at $68. A two-month put (strike price = $70) is available at a $5 premium.. The intrinsic value is ___ and the time value is ____.a.$5 . . . $0.b.$0 . . . $5.c.$3 . . . $2.d.$2 . . . $3. * 32 One percentage point of a bond yield represents:1 basis point10 basis points100 basis points *1000 basis points 33 The yield to maturity consists solely of interest income if:the bond is a zero coupon bond.the bond was purchased at par.*the bond was purchased above par.the bond was purchased below par. 34 In order to have a yield to maturity greater than the coupon rate, the bond must be:selling at a discount.*selling at par.selling at a premium.a zero coupon bond. 35 If a bond is callable, this means:the issuer may change the coupon rate.the investor may convert the bond into stock.the issuer may redeem the bond early.*the investor may cash in the bond at any time.36 The YTM calculation assumes:a.reinvestment of interest is at the coupon rate.b.no reinvestment of interest.c.reinvestment of interest is at YTM rate.*d.reinvestment of interest is at the risk-free rate.37 An increase in reinvestment rate riska. is caused by an increase in interest rates.b. leads to a decline in coupon rates.c. results from a decline in interest rates.*d. results from an increase in inflation.38. The __________ equates the present value of the total future dollars expected to be available at the end of a specific time period, given certain assumptions, to the price of the bond.a. horizon return*b. promised returnc. expected returnd. coupon return39. Find the price of a 10 percent coupon bond with three years to maturity if the yield to maturity is now 12 percent. Use semiannual discounting.a. $1196.70 b. $950.85c. $952.20d. $999.80Solution:Use 6 percent and 6 periods Price= 50(4.917) + 1000(0.705)= 950.8540 With an upward sloping yield curve, which of the following maturities will have the highest yield?a. 5-year.b. 10-year.c. 30-year.*d. 90-day.41.Which of the following statements regarding changes in bond prices relative to changes in market yields is true?Short-term bond prices will increase more than long-term bond prices if market yields increase.Short-term bond prices will increase less than long-term bond prices if market yields decrease.*Short-term bond prices will increase more than long-term bond prices if market yields decrease.Short-term bond prices will remain constant and long-term bond prices will increase if market yields decrease.42 Maturity and coupon being equal, which of the following bonds will have the highest yield to maturity?a. Treasury bond.b. AAA- rated corporate bond.c. BBB+ rated corporate bond.d. BB- rated corporate bond.*43.Which of the following statements about bond prices is FALSE?a. Bond price volatility and time to maturity are directly related.b. A decrease in yields raises prices more than an increase in yields lowers prices.c. Bond price fluctuations and bond coupons are directly related.*d. Bond prices move inversely to bond yields. ................
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