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3. Your broker offers you the opportunity to purchase a bond with coupon payments of $50 per year and a face value of $1000. If the yield to maturity on similar bonds is 6%, this bond should:

A) Sell at a premium C) Sell for par value B) Sell at a discount D) Cannot be determined

4. Suppose you observe the following situation. If the risk free rate is 2%, what are the reward-to-risk ratios (reward divided by risk) for Cooley and Moyers securities? (Note: reward is measured by risk premium and risk is measured by beta).

Security Beta Expected Return

Brady Inc. 0.8 10%

Miko Co. 1.2 14%

A) 10.0, 10.0 C) 7.5, 11.67 B) 7.5, 10.0 D) 10.0, 11.67

5.Over the last 4 years you earned 7%, 5%, 8% and 9%. Your average return is _____ and its standard deviation is ______.

A) 5%, 4.11% C) 7.25%, 1.71% B) 7.25%, 6.03% D) 7.25%, 2.61%

6.According to CAPM, what is the beta on asset A if it has an expected return of 14%, the expected market risk premium is 5%, and the risk-free rate is 2%?

A) 1.90 C) 2.40 B) 2.70 D) 3.10

7. What are the expected returns for Stock A and Stock B respectively?

State Probability Return on A Return on B

Boom .10 16% -2%

Normal .50 10% 5%

Bust .40 5% 9%

A) 8.0%, 6.5% C) 8.2%, 3.9% B) 8.6%, 5.5% D) 8.6%, 5.9%

8.What are the standard deviations for Stock A and Stock B respectively?

State Probability Return on A Return on B

Boom .10 16% -2%

Normal .50 10% 5%

Bust .40 5% 9%

A) 3.41%, 3.24% C) 3.41%, 4.08% B) 3.41%, 3.59% D) 3.32%, 3.92%

9. Assuming that the expected rates of return for stock A and stock B are 12.23% and 9.58% respectively, what is the portfolio expected return with 20% investment in A and the remainder in B?

A) 9.95% C) 10.76% B) 10.11% D) 11.55%

10. What is the risk premium for the following returns if the risk-free rate is 1%?

State Probability Return

Boom .05 15%

Good .40 10%

Recession .30 -4%

Depression .05 -7%

A) 3.2% C) 5.7% B) 2.2% D) 2.5%

11. What is the market value of a 10% coupon bond, assuming that the bond is a semi-annual coupon bond, has a $1,000 face value, 20 years to maturity, and a 9% yield to maturity.

A) $ 956 C) $1,092 B) $ 850 D) $1,110

12. What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 15%, and the stock is expected to be worth $20 one year from now? (hint: one-period holding)

A) $18.65 C) $17.68 B) $19.13 D) $20.15

13. Dizzy Corp. bonds bearing an annual coupon rate of 8%, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $857 per bond. What is the yield to maturity? (The bond has a face value of $1,000).

A) 14.00% C) 18.00% B) 16.00% D) 20.00%

14. Suppose that you have just purchased a share of stock for $45. The most recent dividend was $1 and dividends are expected to grow at a rate of 4% indefinitely. What must your required return be on the stock?

A) 6.31% C) 7.45% B) 6.22% D) 7.59%

15.How much would you pay for a share of Fiffy Inc. stock today if its most recent dividend was $2.2 per share and the dividends are expected to grow at an annual rate of 3% forever? Assuming your required return on Fiffys stock is is 9%.

A) $28.78 C) $37.77 B) $36.67 D) $39.23

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