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1.

What is the present

value of an annuity of $120 received at the end of the year for 11 years?

Assume a discount rate of 7%. The first payment will be received one year from

today (round to the nearest $1).

a. $570

b. $250

c. $400

d. $900

2. You

bought a racehorse that has had a winning streak for six years, bringing in

$250,000 at the end of each year before dying of a heart attack. If you paid

$1,155,720 for the horse 4 years ago, what was your annual return over this

4-year period?

a. 12%

b. 8%

c. 18%

d. 33%

3. How

much money do I need to place into a bank account that pays a 1.08% rate in

order to have $500 at the end of the 7 years?

a. $751.81

b. $463.78

c. $629.51

d. $332.54

4. Your

daughter is born today and you want her to be a millionaire by the time she is

40 years old. You open an investment account that promises to pay 11.5% per

year. How much money must you deposit today so your daughter will have

$1,000,000 by her 35th birthday?

a. $20,100

b. $18,940

c. $28,575

d. $22,150

5. If

you want to have $3,575 in 29 months, how much money must you put in a savings

account today? Assume that the savings account pays 12% and it is compounded

monthly (round to the nearest $1).

a. $2,438

b. $2,679

c. $3,147

d. $3,008

6. U.S.

Savings Bonds are sold at a discount. The face value of the bond represents its

value on its future maturity date. Therefore:

a. The

current price of a $50 face value bond that matures in 10 years will be greater

than the current price of a $50 face value bond that matures in 5 years

b. The

current prices of all $50 face value bonds will be the same, regardless of

their maturity dates because they will all be $50 in the future

c. The

current price of a $50 face value bond will be higher if interest rates

increase

d. The

current price of a $50 face value bond that matures in 10 years will be less

than the current price of a $50 face bond that matures on 5 years

7. You

are considering a sales job that pays you a commission basis or a salaried

position that pay you $50,000 per year. Historical data suggests the following

probability distribution for your commission income. Which job has the higher

expected income?

a. The

salary of $50,000 is less than the expected commission of $50,050

b. The

salary of $50,000 is less than the expected commission of $52,720

c. The

salary of $50,000 is greater than the expected commission of $49,630

d. The

salary of $50,000 is greater than the expected commission of $48,400

8. Beginning

with an investment in one companyâs securities, as we add securities of other

companies to our portfolio, which type of risk declines?

a. Unsystematic

risk

b. Market

risk

c. Systematic

risk

d. Non-diversifiable

risk

9. Assume

the risk-free rate of return is 2% and the market risk premium is 8%. If you

are a risk averse investor, which project should you choose?

a. Project

3

b. Project

2

c. Project

1

d. Either

Project 2 or Project 3 because the higher expected return on project 3 offsets

its higher risk

10. Stock

A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a

beta of 1.8 and a standardization of returns of 18%. If the risk-free rate of

return increases and the market risk premium remains constant, then:

a. The

required returns on stocks A and B will not change

b. The

required returns on stocks A and B will both increase by the same amount

c. The

required return on stocks A will increase more than the required return on

stock B

d. The

required return on stock B will increase more than the required return on stock

A

11. Suppose

the interest rates have been at historically low levels the past two years. A

reasonable strategy for bond investors during this time period would be to:

a. Buy

only junk bonds which have higher interest rate

b. Invest

in long-term bonds to reduce interest rate risk

c. Invest

in short-term bonds to reduce interest rate risk

d. Invest

in long-term bonds to lock in a bond position for when interest rates increase

in the future

12. Fred

and Ethel are both considering buying a corporate bond with a coupon rate of

8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of

the following statements is MOST correct?

a. Fred

and Ethel will only buy the bonds if the bonds are rated BBB or above

b. Because

both Fred and Ethel will receive the same cash flows if they can each buy a

bond they both must assign the same value to the bond

c. If

Fred decides to buy the bond, then Ethel will also decide to buy the bond if

markets are efficient

d. Fred

may determine a different value for a bond than Ethel because each investor may

have a different level of risk aversion, and hence a different required return

13. Which

of the following statements is true?

a. Short-term

bonds have greater interest rate risk than do long-term bonds

b. Long-term

bonds have greater interest rate risk than do short-term bonds

c. Interest

rate risk is highest during periods of high interest rates

d. All

bonds have equal interest rate risk

14. Crandleâs

common stock is currently selling for $79.00. It just paid a dividend of $4.60

and dividends are expected to grow at a rate of 5% indefinitely. What is the

required rate of return on Crandleâs stock?

a. 11.76%

b. 11.11%

c. 12.2

%

d. 14.21%

15. An

example of the growth factor in common stock is:

a. Retaining

profits in order to reinvest into the firm

b. Two

strong companies merging together to increase their economies of scale

c. Acquiring

a loan to fund an investment in Asia

d. Issuing

new stock to provide capital for future growth

16. Waterfront

Solutions, Inc. paid a dividend of $5.00 per share on its common stock

yesterday. Dividends are expected to grow at a constant rate of 4% for the next

two years, at which point the stock is expected to sell for $56.00. If

investors require a rate of return on Waterfrontâs common stock of 18%, what

should the stock sell for today?

a. $40.22

b. $50.22

c. $44.76

d. $48.51

17. Andreâs

parents established a college savings plan for him when he was born. They

deposited $50 into the account on the last day of each month. The account has

earned 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th

birthday to spend on his education?

a. $33,307

b. $30,028

c. $43,730

d. $27,560

18. Charlie

wants to retire in 15 years, and he wants to have an annuity of $50,000 a year

for 20 years after retirement. Charlie wants to receive the first annuity

payment the day he retires. Using an interest rate of 8%, how much must Charlie

invest today in order to have his retirement annuity (round to the nearest

$10).

a. $167,130

b. $315,240

c. $256,890

d. $200,450

19. The

beta for the portfolio is:

a. 1.45

b. 1.27

c. 1.99

d. 1.77

20. Which

of the following will cause the value of a bond to increase, if other things

held the same?

a. Interest

rates decrease

b. The

companyâs debt rating drops from AAA to BBB

c. Investorâs

required rate of return increases

d. The

bond is callable

21. A

small biotechnology research corporation has been experiencing losses for the

first three years of its existence, and thus has a negative balance in retained

earnings. The corporationâs stock price, however, is $1 per share. Which of the

following statements is most accurate?

a. The

required return on the stock will be small because the company has very few

assets

b. Investors

believe the stock is worth $1 per share because the earnings (and cash flow)

are expected to be positive

c. The

corporationâs accountants must have made a mistake because retained earnings

may not be negative

d. Investors

are irrational to pay $1 per share when earnings per share have been negative

for three years

22. How

much money must be put into a bank account yielding 6.42% (compounded annually)

in order to have $1,671 at the end of 11 years? (round to the nearest $1).

a. $798

b. $886

c. $921

d. $843

23. Wendy

purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold

the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the

risk-free rate of return is 3%, and the market risk premium is 8%. The required

return on Genetics Stock is:

a. 21.1%

b. 13.4%

c. 16.5%

d. 17.6%

24. Bartâs

Moving Company bonds have an 11% coupon rate. Interest is paid semiannually.

The bonds have a par value of $1,000 and will mature 8 years from now. Compute

the value of Bartâs Moving Company bonds if investors required rate of return

is 9.5%.

a. $1,133.05

b. $1,098.99

c. $1,082.75

d. $1,197.27

25. Jackson

Corp. common stock paid $2.50 in dividends last year (DO). Dividends are

expected to grow at a 12% annual rate forever. If Jacksonâs current market

price is $40.00, what is the stockâs expected rate of return? (round to nearest

.01%)

a. 18.25%

b. 5.50%

c. 11.00%

d. 19.00%