PART A

MULTIPLE CHOICE: ANSWER ALL QUESTIONS

Answer all questions. Write in your answer book the number of the question and ONE letter. Question 1

Consider a bond with a 10% coupon and with yield to maturity = 8%. If the bond’s yield to maturity remains constant, then in 1 year the bond’s price will be: a. Higher

b. Lower

c. Unchanged

d. Cannot answer based on given information

Question 2

The yield to maturity on a bond is:

a. Below the coupon rate when the bond sells at a discount, and above the coupon rate when the bond sells at a premium.

b. The discount rate that will set the present value of the payments equal to the bond price. c. The current yield plus the average annual capital gain rate. d. Based on the assumption that any payments received are reinvested at the coupon rate. Question 3

The McDonald Group purchased a piece of property for $1.2 million. It paid a down-payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75% compounded monthly. What is the amount of each mortgage payment?

a. $7,440.01

b. $8,978.26

c. $9,036.25

d. $9,399.18

Question 4

One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $5,000 to this account. It plans on making a final deposit of $7,500 to the account next year. How much will be available when it is ready to buy the equipment, assuming it earns a 7% rate of return? a. $19,430.84

b. $19,683.25

c. $20,194.54

d. $20,790.99

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Question 5

What is the future value of investing $3,000 for 3/4 of a year at a continuously compounded rate of 12%?

a. $3,163

b. $3,263

c. $3,283

d. $3,287

Question 6

If the three-year present value annuity factor is 2.673 and two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the 3 years? a. $1.1905

b. $0.84

c. $0.89

d. None of the above

Question 7

The net present value of a growth opportunity, NPVGO, can be defined as: a. the initial investment necessary for a new project.

b. the net present value per share of an investment in a new project. c. a continual reinvestment of earnings when r < g.

d. a single period investment when r > g.

Question 8

Which of the following are correct?

I. Stocks with a beta of zero offer an expected rate of return of zero. II. The CAPM implies that investors require a higher return to hold highly volatile securities. III. You can construct a portfolio with beta of .75 by investing .75 of the investment budget in Tbills and the remainder in the market portfolio.

a. I and II only

b. II only

c. I and III only

d. None of the above

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Question 9

Beta and standard deviation differ as risk measures in that beta measures: a. Only unsystematic risk, while standard deviation measures total risk. b. Only systematic risk, while standard deviation measures total risk. c. Both systematic and unsystematic risk, while standard deviation measures only unsystematic risk.

d. Both systematic and unsystematic risk, while standard deviation measures only systematic risk. Question 10

Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant made the following arguments:

I. Both the CAPM and APT require a mean-variance efficient market portfolio. II. Neither the CAPM nor APT assumes normally distributed security returns. III. The CAPM assumes that one specific factor explains security returns but APT does not. Which of the statements above is correct?

a. I and III only

b. II only

c. I, II and III

d. III only

[TOTAL 25 MARKS]

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PART B

Answer only THREE of the following FOUR questions (25% each) QUESTION 11

(a)

Karen Kay, a portfolio manager at Collins Asset Management, is using the capital...