Module 2 Quiz Questions PDF

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Module 2: Quiz Let me start by setting up your (Ti-84 Plus) calculator for these questions/answers. Press “Mode” Go down to float and you want to choose “2” for 2 decimal places Press “2nd” and then “mode” Press “apps” “enter” on Finance “enter” on TVM Solver Plug in your answers for the equation If...

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Module 2: Quiz Let me start by setting up your (Ti-84 Plus) calculator for these questions/answers. Press “Mode” Go down to float and you want to choose “2” for 2 decimal places Press “2nd” and then “mode” Press “apps” “enter” on Finance “enter” on TVM Solver Plug in your answers for the equation If you are solving for FV, PV, PMT, N, or I% press “alpha” and then “enter”--- YOUR ANSWER WILL BE BLINKING! 1. A company issues a bond with the provision that it may pay off the debt early. This bond is subject to which type of risk? Select one: Located under Optional Reading: Risk; “Prepayment risk is the risk that the buyer goes ahead and pays off the mortgage. Therefore, the buyer of the bond loses the right to the buyer’s interest payments over time”. Example: If you have a loan with a bank for 30 years, you want to take 30 years to pay for it or there might be a penalty if you pay it back to soon. a. Prepayment risk. b. Model risk. c. Interest rate risk. d. All of the above. 2. What will $247,000 grow to be in 9 years if it is invested today in an account with an annual interest rate View page 3 on the Formula sheet; Pg. 42 Chapter 2 states, “Value of investment after 1 of 11%? year = Initial investment × (1 + r) where ‘r’ is the interest rate in decimal form”. Equation: n=9 r = 11 PV = 247000 solve for FV a. $637,365.32 b. $351,268.46 c. $96,558.42 d. $631,835.12 3. Approximately how many years will it take for $136,000 to grow to be $468,000 if it is invested in an account with an annual interest rate of 8%? Choose the closest answer. Select one: View page 4 on the formula sheet.

Equation: r = .08 PV = 136000 FV = 468000 solve for n

*On your calculator look for “LN”; you will use that function to complete this equation* a. 21 years. b. 11 years. c. 16 years. d. Error 5. 4. At what annual interest rate must $137,000 be invested so that it will grow to be $475,000 in 14 years? Choose the closest rate. View page 4 on the formula sheet. Equation: n=14 PV = 137000 FV = 475000 solve for r or “I” a. 9.29% b. 11.58% c. 3.2% d. 15.69% 5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an account that pays a quoted annual interest rate of 13% with semi-annual compounding of interest? Round to the nearest dollar. Equation: n = 10 (5 years X 2 comp. periods per year) i = 6.5 (13% annually / by 2 comp. semi- annually period per year) FV = 197,000 FV=[1+(r/m)]^m*n 197000=[1+(.13/2)]^2*5 197000=1.877 A=$104,954 solve for PV a. $104,947 b. $106,924 c. $58,034 d. $143,787 6. What will $153,000 grow to be in 13 years if it is invested today in an account with a quoted annual interest rate of 10% with monthly compounding of interest? Round to the nearest dollar. Equation:

n = 156 (13 years times 12 comp. periods per year) i = 0.833333 (10% annually divided by 12 comp. periods per year) PV = 153,000 FV = $153,000 * (1+.1/12)^(12*13) = $153,000 * (1.00833)^156

= $153,000 * 3.649584184 solve for FV * Since it mentions it is being invested today, this makes it an annuity due. Make sure your calculator is in begin (BGN) mode when working with an annuity due. To do this press 2nd and then BGN which is the 2nd function of the PMT button. Then press 2nd and then SET which is the 2nd function of ENTER. Make sure to take your calculator out of BGN mode when working with an ordinary annuity. * If you have a TI-84 Plus go to apps, finance, tvm solver, and look at the bottom of the screen. a. $253,605.32 b. $528,197.50 c. $368,431.45 d. $558,386 7. You are offered an investment with a quoted annual interest rate of 13% with quarterly compounding of interest. What is your effective annual interest rate? Formula not provided here; use calculator n = 4 (number of comp. periods in one year) i = 3.25 (13% annually divided by 4 comp. periods in one year) PV = 100 = 113.65 solve for FV a. 12.48% b. 15.23% c. 11.01% d. 13.65% 8. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment will occur one year from today). If you feel that the appropriate discount rate is 13%, what is the annuity worth to you today? Round to the nearest dollar. Formula not provided here; use calculator n = 11 i = 13 PMT = 24000 solve for PV *Make sure you are in end mode*

a. $136,487 b. $6,257 c. $92,061 d. $142,743 9. You plan to buy a car that has a total "drive-out" cost of $25,700. You will make a down payment of $3,598. The remainder of the car’s cost will be financed over a period of 5 years. You will repay the loan by making equal monthly payments. Your quoted annual interest rate is 8% with monthly compounding of interest. (The first payment will be due one month after the purchase date.) What will your monthly payment be? Formula not provided here; use calculator n = 60 (5 years times 12 payments per year) i = 0.6667 (8% annually divided by 12 payments per year)

PV = 22102 ($25,700 price minus down payment of $3,598) Make sure you are in end mode Solve for PMT a. $265.48 b. $506.68 c. $448.15 d. $389.42 10. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each year) in an account that pays an annual interest rate of 14%, what will your account be worth at the end of 12 years? Round to the nearest dollar. Formula not provided here; use calculator n = 12 i = 14 PMT = 16000 Make sure you are in end mode. solve for FV a. $436,332 b. $394,563 c. $518,281 d. $255,068 11. John and Peggy recently bought a house. They financed the house with a $125,000, 30-year mortgage with a nominal annual interest rate of 7 percent with monthly compounding. Mortgage payments are made at the end of each month. What is the monthly mortgage payment? Select one: Formula not provided here; use calculator The Present value of an annuity formula on pg. 48. and solved for "A". r= (.07/12): compounding interest monthly = 0.5833 n = 30 * 12 = 360 number of payments PV = 125000 125,000 = A (7.11649/.047346) 125,000 = A (150.3074101) 125,000/150.3074101 = A A = 831.628 Make sure you are in end mode. solve for PMT a. $958.62 b. $10,073.30 c. $8,750.00 d. $831.63 12. By increasing the number of compounding periods in a year, while holding the stated annual interest rate constant, you will... Select one: a. not change the effective annual rate. b. increases the effective annual rate. c. decreases the effective annual rate. d. There is not enough information to answer the question. 13. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? Formula not provided here; use calculator n = 13 i = 14

FV = 140000 solve for PV a. $65,826.64 b. $768,937.61 c. $121,534.23 d. $25,489.71 14. A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return? Select one: (.8*.1) + (.2*0)=.08 (.5*.2) + (.5*-.1) = .05 [.08 * (70/100)] + [.05 * (30/100)] OR The best way to solve this problem is by, first, determining the expected return on bonds and stocks, and then calculating the expected return on this particular portfolio: 1. Expected Return on Stocks and Bonds Stocks: (0.5 x 20%) + (0.5 x -10%) = 5% Bonds: (0.8 x 10%) + (0.2 x 0%) = 8% 2. Portfolio's Expected Return Weights are (30000/100000) = 0.3 for stocks and (70000/100000) = 0.7 for bonds (0.3 x 5%) + (0.7 x 8%) = 7.10% a. 7.10% b. 5.90% c. 13% d. 2.90% 15. You are planning for retirement 34 years from now. You plan to invest $575 at the end of the month for the following 34 years (assume all cash flows occur at the end of each month). If you believe you will earn an effective annual rate of return of 9.7%, what will your retirement investment be worth 34 years from now? Round to the nearest dollar. The FV ordinary annuity. Select one: r = .097/12 n= (34*12) c=575 N = 34 * 12 = 408 PMT = -575 I/Y = 9.7/12 = 0.8083333 CPT FV = 1,828,293.27 Since we do not have a NFV key, we have to solve this problem in two steps. First, calculate the PV of the uneven cash flows. Second, calculate the future value as a lump sum problem. CF0 = 0 C01 = 4200 F01(Nj) =7 C02 = 6900 F02(Nj) =11 C03 = 14500 F03(Nj) =16 i = 9.7

NPV = $66,239.9844 TI83: npv(9.7,0,{4200,6900,14500},{7,11,16}) n = 34 i = 9.7 PV = -66239.9844 solve for FV a. There's not enough information to answer this question. b. $1,828,293 c. $234,600 d. $132,086 16. A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio?" Select one: a. 8.10% b. 7.30% c. 7% d. 7.50% 17. A potential merger is announced between Company A and B. Which of the following is a potential response to that announcement? Select one: a. All of these answers. b. Company A's stock is downgraded, because analysts believe the merger signals A is financially weak. c. Company A's stock is upgraded because analysts believe the merger will increase its marketshare. d. Nothing happens because analysts picked up on signals prior to the announcement that the merger would occur.

18. A stock has a beta of 0.75 in relation to the Dow Jones Industrial Index. Today, the Dow Jones increased by 2%. Based on its beta, predict what happened to the stock's price. Select one: a. The stock's price increased by 2%. b. The stock's price decreased by less than 2%. c. The stock's price increased by less than 2%. d. The stock's price increased by more than 2%. 19. In which of the following ways can technical analysts use a company's announcements, news and returns to determine whether to buy the company's stock? Select one: a. They can use the returns to study the company's growth patterns and stock price fluctuations. b. All of these answers. c. They can review the company's press releases to evaluate the company's managerial competence. d. They can review the company's press releases to analyze its competitive advantages. 20. The adequately diversify your portfolio, you need to do more than just own a variety of securities. Which of the following is a necessary component of a well-diversified portfolio that has a low variance? Select one: a. The portfolio's components are in a variety of asset classes, such as commodities and derivatives. b. All of these answers.

c. The component securities have small or negative correlation coefficients. d. The portfolio is reviewed and rebalanced based on updated projections and new information. 21. Under the capital asset pricing model (CAPM), what beta value is considered risky? Select one: Pg. 72; Chapter 3, states “A stock with a beta of 1.0 rises and falls at the same percentage as the market. Stocks with a beta greater than1.0 (aggressive stocks) tend to rise and fall by a greater percentage than the market. That is they are very sensitive to market swings. Stocks with beta less than 1.0 (defensive stocks) are less sensitive to market swings. The market, by definition, has a beta of 1.0.” a. A beta above 1 b. A beta equal to 0 c. None of these d. A beta between 0 and 1 22. What factors should be considered when weighting an investment portfolio? Select one: a. The time frame of the investment. b. All of these answers. c. The specific risks of the individual securities. d. The investor's risk tolerance. 23. Which of the following statements accurately describes systemic risk? Select one: Located under Optional Reading: Risk; “Systematic risk: The risk associated with an asset that is correlated with the risk of asset markets generally, often measured as its beta”. OR Pg. 64 Chapter 3 states, “systematic risk, the non-diversifiable portion that is related to the movement of the stock market. Examples of systematic risk factors are: increase in long-term interest rates, RBI stepping up its restrictive monetary policy.” a. By diversifying your stock portfolio, you can minimize systemic risk. b. Systemic risk is what provides a stock its risk premium. c. An example of a systemic risk is if you own stock in a company that has liquidity problems. d. All of these answers. 24. Over a period of three days, a company stock increased by 4%, decreased by 2%, then increased by 6%. During that same period, the Dow Jones increased by 2%, decreased by 1%, and then increased by 3%. What is the company's beta? Select one: *A stock with a beta > 1.0 is aggressive and very sensitive to market swings. Such stocks tend to rise and fall by a greater percentage than the market. The only answer choice for #24 that would suggest a very aggressive/sensitive beta in this case would be 2 (beta > 1.0).You'll notice in the problem that the stock rose and fell by greater percentages than the market as a whole. Although -2 is an answer choice, that would suggest a negative/inverse relationship (i.e., stock would decrease when market increases, and vice versa) - not the case here* The company stock increased 4% when the Dow Jones increased 2%. 4% / 2% = 2 The company stock increased 2% when the Dow Jones increased 1%. 2% / 1% = 2 The company stock increased 6% when the Dow Jones increased 3%. 6% / 3% = 2 a. 0.5 b. 2 c. -0.5

d. -2 25. A relatively new tech company issues a bond that is publicly traded. The company is based in the US and pays interest in dollars. The potential investor lives in the UK. Which of the following risks does the investor face if he buys the bond? Select one: a. All of these answers. b. Market risk. c. Foreign investment risk. d. Credit risk. 26. A portfolio is composed of 80% stock and 20% bonds. The variance of stock is 170 and the variance of bonds is 140. The covariance is 30. What is the portfolio's variance? Two-asset portfolio variance as follows: Select one: (0.8^2 * 170) + (0.2^2 * 140) + (2 * 0.8 * 0.2 * 30) = 124 A portfolio's variance is the sum of the individual assets' variances (adjusted by the square of their weights in the portfolio), plus the degree of co-variation among the stocks. The term 2 x 0.8 x 0.2 x 30 is the measure of co-variation. It is one term, so do not separate the 2 with the 0.8 and the 0.2 with the 30. If the covariance is close to zero, then the total portfolio variance is the sum of the individual variances (adjusted by the square of their weights). If covariance is positive, then the portfolio's variance is bigger than this value. If covariance is negative, then the total portfolio variance is small than that value. *On 01/26/2018, it was discovered that the answer, 124, was not actually an answer to choose from, but was the correct answer* a. 101 b. 168 c. 119 d. 114 27. A company's security is priced above the security market line. Which of the following statements regarding that security is true? Select one: Located under Optional Reading: Understanding the Security Market Line; “An instrument plotted above the line has a high expected return and a low price. This would not be an attractive market situation for a company looking to raise capital. Such a firm wants to raise as much money as possible, which means getting investors to pay the highest price possible.” a. This is not an attractive market situation for the company issuing the security. b. This isn't an attractive market situation for a potential investor looking to purchase the security. c. The security is fairly priced for the amount of expected return. d. All of these answers. 28. An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return? Select one: a. $54,500 b. $38,750 c. $62,000 d. $50,000 29. The most common measure of risk in finance is the:

Select one: a. Expected Return b. Expected Outcome c. Standard Outcome d. Standard Deviation 30. A company has a risk free rate of 3%. The market rate of return is 8% and the company has a beta of 2. What is the company's expected rate of return? Select one: Remember that risk premium = market return - risk free rate E return = risk free rate + beta (risk premium) OR risk free rate + beta (R mkt - risk free rate) 0.03 + 2 (0.08 - 0.03) 0.03 + 2 (0.05) 0.03 + 0.1 0.13 or 13% a. 18% b. 13% c. 8% d. 10%...