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A bond pays a coupon (or interest) rate of 5 percent each year for five years, with a future (face) value of $200. If the bond were sold today, what would be the present value of the bond?


A) $200
B) $157
C) $150
D) $145

E) A) and D)
F) B) and D)

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Refer to the graph. The intercept of the three Security Market Lines is determined by A) the risk-free interest rate. B) the interest rate on financial assets with a beta of 1. C) the rate on long-term U.S. government bonds. D) all of these. Refer to the graph. The intercept of the three Security Market Lines is determined by


A) the risk-free interest rate.
B) the interest rate on financial assets with a beta of 1.
C) the rate on long-term U.S. government bonds.
D) all of these.

E) B) and C)
F) None of the above

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Brinley holds stock in large high-tech companies in his portfolio. The best way for Brinley to diversify his risk would be to buy


A) more shares of the stock he already owns.
B) shares in other large high-tech companies.
C) bonds or stocks of small and medium-sized companies.
D) bonds from the large high-tech companies already in his portfolio.

E) B) and C)
F) C) and D)

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"An investment's rate of return is inversely related to its price." Explain.

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This statement is a fundamental concept ...

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Mutual funds allow individuals to own corporate stocks or bonds indirectly.

A) True
B) False

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Arbitrage occurs when investors try to profit from situations where


A) stock rates of return exceed bond rates of return.
B) bond rates of return exceed stock rates of return.
C) two identical assets have different rates of return.
D) returns on financial assets exceed returns on real assets.

E) C) and D)
F) None of the above

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The average expected rate of return is a


A) volume-weighted average.
B) price-weighted average.
C) probability-weighted average.
D) value-weighted average.

E) A) and B)
F) A) and C)

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Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company profits, $1 for each share he owns. If Indy sells all his shares at A price of $30 per share, he will receive a


A) total capital gain of $10.
B) dividend of $10 per share.
C) total capital gain of $1,000.
D) capital gain of $30 per share.

E) B) and C)
F) A) and D)

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Refer to the graph. Which of the three Security Market Lines depicts the situation where investors most dislike risk? A) line A B) line B C) line C D) It cannot be determined from the graph. Refer to the graph. Which of the three Security Market Lines depicts the situation where investors most dislike risk?


A) line A
B) line B
C) line C
D) It cannot be determined from the graph.

E) All of the above
F) A) and C)

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Future value measures the present-day value of returns or costs expected to arrive in the future.

A) True
B) False

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Which of the following is a difference between stocks and bonds?


A) Bonds represent ownership; stocks represent debt.
B) Bonds make interest payments; stocks pay dividends.
C) Stock payouts are predictable; bond payouts are not.
D) All of these are differences between stocks and bonds.

E) All of the above
F) B) and D)

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Refer to the graph. Which of the following would best be explained by an expansionary monetary policy? A) a shift from SML \mathrm { SML } _ { 1 } \text { to } \mathrm { SML } { } _ { 2 } B) a shift from SML \mathrm { SML } _ { 2 } \text { to } \mathrm { SML } _ { 1 } C) a move from A _ { 1 } \text { to } A _ { 2 } D) a move from A _ { 2 } \text { to } A _ { 3 } Refer to the graph. Which of the following would best be explained by an expansionary monetary policy?


A) a shift from SML SML1 to SML2\mathrm { SML } _ { 1 } \text { to } \mathrm { SML } { } _ { 2 }
B) a shift from SML SML2 to SML1\mathrm { SML } _ { 2 } \text { to } \mathrm { SML } _ { 1 }
C) a move from A1 to A2A _ { 1 } \text { to } A _ { 2 }
D) a move from A2 to A3A _ { 2 } \text { to } A _ { 3 }

E) All of the above
F) B) and C)

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Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6 percent to be repaid after five years. How much will be required to pay off the loan at the end of the five Years?


A) $401.47
B) $390
C) $393.54
D) $408.75

E) B) and D)
F) B) and C)

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"There is no such thing as risk-free return." Evaluate.

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This statement is not correct. There is ...

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What does the "beta" of an asset measure?


A) how the nondiversifiable risk compares with diversifiable risk for an asset
B) how the expected return compares with the diversifiable risk of a given asset
C) how the expected return compares with the nondiversifiable risk of the market portfolio
D) how the nondiversifiable risk of a given asset compares with that of the market portfolio

E) None of the above
F) All of the above

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Shawna bought an antique table for $200 last year and is now selling it for $250. Her rate of return on the table is


A) 10 percent.
B) 20 percent.
C) 25 percent.
D) 30 percent.

E) All of the above
F) C) and D)

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Which institution is least likely to default on a bond?


A) local government
B) small corporation
C) U.S. federal government
D) large corporation

E) C) and D)
F) None of the above

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Payments to shareholders from corporate profits are known as


A) dividends.
B) capital gains.
C) interest.
D) appreciation.

E) A) and B)
F) B) and C)

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Arbitrage refers to the buying and selling activities that cause an equalization of the rates of return on assets that have substantially different characteristics.

A) True
B) False

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Denny buys a rare coin for $200 and sells the coin one year later for $220. Denny's rate of return is


A) 10 percent.
B) 20 percent.
C) 91 percent.
D) 110 percent.

E) A) and D)
F) None of the above

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