F10 Final Exam

3530 F10 Final Exam and Solutions - Type A 1. Two years ago Zippy Inc. issued a zero-coupon bond with a $1,000 face value and a ten year maturity. If the bond's yield to maturity today is 3.50%, what is the current price of the bond? (assume annual compounding) A) $708.92 B) $759.42 C) $825.50 D) $933.51 E) $1000 Solution B PV of bond = 1000/(1.035)^8 = $759.41 2. Topaz Bank’s earnings and dividends are expected to grow at a rate of 10% during the next 2 years, at 8% in the third year, and at a constant rate of 6% thereafter. If last dividend paid was $1.20 and the required rate of return on its common stock is 12%. How much should you pay today for one share of Topaz Bank? A) $23.17 B) $25.55 C) $27.71 D) $31.16 E) $35.41 Solution A DIV0 =
The standard deviation of a portfolio of 2 stocks is A) The portfolio weighted average of the standard deviations of the individual stocks within the portfolio. B) Portfolio weighted average of the standard deviations of the individual stocks within the portfolio only if the 2 stocks are perfectly correlated. C) The portfolio weighted average of the standard deviations of the individual stocks within the portfolio if the 2 stocks are perfectly uncorrelated. D) The portfolio weighted average of the standard deviations of the individual stocks within the portfolio if the 2 stocks have a perfect negative correlation. E) None of the above. Solution B If rho is zero the whole third term under the square root disappears and what is left is not a perfect square. If rho is one, then what is left under the square root is a perfect square in the form of (a+b)2 = a2 + b2 + 2ab 46. Which of the following statements is (are) true concerning risk and return? I. To accept higher levels of risk, investors must be paid a higher risk premium. II. Smaller company stocks generally offer a higher return and less risk than larger company stocks. III. The risk free rate of return is based on the long term government bond rate. IV. The higher the standard deviation of a security, the less predictable the rate of return in any one year. A) I only B) II only C) III and IV only D) I and II only E) I and IV only Solution E 47. Which of the following are examples of systematic risk? I. An increase in the growth rate of Gross Domestic Product II. A decrease in the productivity of a company's workers III. A decrease in the rate of inflation. IV. A decrease in a firm's cost of borrowing A) B) C) D) E) I and II only I and III only II and IV only II and III only I, III, and IV