Question 1

Moody's and Standard and Poor's provide ratings of short-term debt on a:

Accepted Answer

A) three-point scale. 
B) five-point scale. 
C) 19-point scale. 
D) four-point scale. 
A) three-point scale. 
B) five-point scale. 
C) 19-point scale. 
D) four-point scale.

Question 2

There is a natural tendency for the yield on long-term bonds to be greater than on short-term bonds because:

Accepted Answer

A) holders of long-term bonds benefit most from a fall in interest rates. 
B) reinvestment risk is more pronounced for long-term bonds than short-term bonds. 
C) long-term bonds are more price-sensitive than short-term bonds. 
D) the risk of default is greater for long-term bonds. 
A) holders of long-term bonds benefit most from a fall in interest rates. 
B) reinvestment risk is more pronounced for long-term bonds than short-term bonds. 
C) long-term bonds are more price-sensitive than short-term bonds. 
D) the risk of default is greater for long-term bonds.

Question 3

Which statement regarding bond prices is false?

Accepted Answer

A) If interest rates rise,bond prices will fall. 
B) All bond prices respond to changes in interest rates in the opposite direction,but they do not all respond to the same extent. 
C) Bond prices and interest rates are negatively correlated. 
D) If bond prices rise,interest rates will fall. 
A) If interest rates rise,bond prices will fall. 
B) All bond prices respond to changes in interest rates in the opposite direction,but they do not all respond to the same extent. 
C) Bond prices and interest rates are negatively correlated. 
D) If bond prices rise,interest rates will fall.

Question 4

Calculate the expected capital gain on a share that costs $1 and pays a 7c dividend if the share is sold in two years' time.Assume that the required rate of return for such a share is 7% p.a.

Accepted Answer

A) Loss of 12.7c. 
B) Gain of 14c. 
C) None of the given options. 
D) Gain of 14.49c. 
A) Loss of 12.7c. 
B) Gain of 14c. 
C) None of the given options. 
D) Gain of 14.49c.

Question 5

An upward-sloping yield curve can best be explained by:

Accepted Answer

A) the relationship between nominal interest rates and expected inflation rates. 
B) the expectation that short-term interest rates will decrease in the future. 
C) the fact that short-term interest rates are more inflation-sensitive than long-term rates. 
D) the expectation that inflation will increase in the future. 
A) the relationship between nominal interest rates and expected inflation rates. 
B) the expectation that short-term interest rates will decrease in the future. 
C) the fact that short-term interest rates are more inflation-sensitive than long-term rates. 
D) the expectation that inflation will increase in the future.

Question 6

Immunisation can best be described as:

Accepted Answer

A) the ability of investors to choose a bond investment that minimises reinvestment risk. 
B) the ability of investors to choose a bond investment that minimises interest rate risk. 
C) the ability of investors to choose a bond investment that matches cash inflows with outflows. 
D) the ability of investors to choose a bond investment that achieves some future target regardless of changes to interest rates. 
A) the ability of investors to choose a bond investment that minimises reinvestment risk. 
B) the ability of investors to choose a bond investment that minimises interest rate risk. 
C) the ability of investors to choose a bond investment that matches cash inflows with outflows. 
D) the ability of investors to choose a bond investment that achieves some future target regardless of changes to interest rates.

Question 7

The expectations theory of the term structure of interest implies that:

Accepted Answer

A) interest received on securities is in accordance with term to maturity. 
B) bond investors can expect to achieve the same return over any future period,regardless of the security in which they invest. 
C) there is a premium due to uncertainty about the future level of interest rates. 
D) there is a risk that borrowers may default on the payment of the principal. 
A) interest received on securities is in accordance with term to maturity. 
B) bond investors can expect to achieve the same return over any future period,regardless of the security in which they invest. 
C) there is a premium due to uncertainty about the future level of interest rates. 
D) there is a risk that borrowers may default on the payment of the principal.

Question 8

The higher the market's assessment of the probability of default,the ___________ the required rate of return on the debt.

Accepted Answer

The answer of The higher the market's assessment of the...

Question 9

The latest dividend paid by ABC Ltd is 40 cents and the company retains 20 per cent of its earnings each year,which is invested to earn a rate of return of 25% p.a.Assuming the required rate of return on ABC's shares is 15% p.a. ,the price of ABC Ltd shares will be:

Accepted Answer

A) $3.33. 
B) $5. 
C) $4. 
D) $4.20. 
A) $3.33. 
B) $5. 
C) $4. 
D) $4.20.

Question 10

Liquidity premium theory suggests that:

Accepted Answer

A) there is a downward bias in the yield curve. 
B) the market for some securities may be thinly traded;hence,investors require a reward for this risk. 
C) there is an upward bias in the yield curve because interest rate risk decreases with term to maturity. 
D) there is a premium due to uncertainty about the future level of interest rates. 
A) there is a downward bias in the yield curve. 
B) the market for some securities may be thinly traded;hence,investors require a reward for this risk. 
C) there is an upward bias in the yield curve because interest rate risk decreases with term to maturity. 
D) there is a premium due to uncertainty about the future level of interest rates.

Question 11

When interest rates increase,interest receipts can be rolled over into a new investment with a higher interest rate.This is known as the _____________ effect.

Accepted Answer

The answer of When interest rates increase,interest receipts can be...

Question 12

The periodic cash flows from an investment in shares are called:

Accepted Answer

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

Question 13

Risk of default implies that:

Accepted Answer

A) there is an upward-sloping yield curve. 
B) there is a downward-sloping yield curve. 
C) AAA-rated bonds are more heavily discounted than BBB-rated bonds. 
D) AAA-rated bonds are less heavily discounted than BBB-rated bonds. 
A) there is an upward-sloping yield curve. 
B) there is a downward-sloping yield curve. 
C) AAA-rated bonds are more heavily discounted than BBB-rated bonds. 
D) AAA-rated bonds are less heavily discounted than BBB-rated bonds.

Question 14

A flat term structure implies that investors expect future short-term interest rates to:

Accepted Answer

A) decrease. 
B) increase. 
C) be the same as the current rate. 
D) none of the options given. 
A) decrease. 
B) increase. 
C) be the same as the current rate. 
D) none of the options given.

Question 15

The 'price effect',with regards to bonds,refers to the:

Accepted Answer

A) capital gains or losses that occur when interest rates change. 
B) relationship between market interest rates and bond prices. 
C) present value of interest income and redemption value. 
D) relationship between risk and bond prices. 
A) capital gains or losses that occur when interest rates change. 
B) relationship between market interest rates and bond prices. 
C) present value of interest income and redemption value. 
D) relationship between risk and bond prices.

Question 16

According to the expectations theory of the term structure of interest,if the 1-year bond rate today is 6% p.a.and the 2-year bond rate today is 7% p.a. ,what is the 1-year bond rate next year?

Accepted Answer

A) 6% 
B) 6.75% 
C) 7.5% 
D) 8% 
A) 6% 
B) 6.75% 
C) 7.5% 
D) 8%

Question 17

In general,an upward-sloping term structure implies that investors expect future short-term interest rates to:

Accepted Answer

A) decrease. 
B) increase. 
C) be the same as the current rate. 
D) increase by a minimum of 5bp. 
A) decrease. 
B) increase. 
C) be the same as the current rate. 
D) increase by a minimum of 5bp.

Question 18

All other things being equal,an investor will buy a security of high marketability only if the yield is greater than that on a security of low marketability.

Accepted Answer

A) True 
 B)False

Question 19

The connection between term and interest rates is called:

Accepted Answer

A) interest rate risk. 
B) price risk. 
C) term structure of interest rates. 
D) default structure of interest rates. 
A) interest rate risk. 
B) price risk. 
C) term structure of interest rates. 
D) default structure of interest rates.

Question 20

A company just paid a dividend of $1.20.If this is expected to increase by 3% p.a.indefinitely,and the required rate of return is 8%,then the theoretical share price is $15.

Accepted Answer

A) True 
 B)False

Exam 4: Applying the Time Value of Money to Security Valuation

Moody's and Standard and Poor's provide ratings of short-term debt on a:

There is a natural tendency for the yield on long-term bonds to be greater than on short-term bonds because:

Which statement regarding bond prices is false?

Calculate the expected capital gain on a share that costs $1 and pays a 7c dividend if the share is sold in two years' time.Assume that the required rate of return for such a share is 7% p.a.

An upward-sloping yield curve can best be explained by:

Immunisation can best be described as:

The expectations theory of the term structure of interest implies that:

The higher the market's assessment of the probability of default,the ___________ the required rate of return on the debt.

The latest dividend paid by ABC Ltd is 40 cents and the company retains 20 per cent of its earnings each year,which is invested to earn a rate of return of 25% p.a.Assuming the required rate of return on ABC's shares is 15% p.a. ,the price of ABC Ltd shares will be:

Liquidity premium theory suggests that:

When interest rates increase,interest receipts can be rolled over into a new investment with a higher interest rate.This is known as the _____________ effect.

The periodic cash flows from an investment in shares are called:

Risk of default implies that:

A flat term structure implies that investors expect future short-term interest rates to:

The 'price effect',with regards to bonds,refers to the:

According to the expectations theory of the term structure of interest,if the 1-year bond rate today is 6% p.a.and the 2-year bond rate today is 7% p.a. ,what is the 1-year bond rate next year?

In general,an upward-sloping term structure implies that investors expect future short-term interest rates to:

All other things being equal,an investor will buy a security of high marketability only if the yield is greater than that on a security of low marketability.

The connection between term and interest rates is called:

A company just paid a dividend of $1.20.If this is expected to increase by 3% p.a.indefinitely,and the required rate of return is 8%,then the theoretical share price is $15.

Introduction

Consumption, Investment and the Capital Market

The Time Value of Money: An Introduction to Financial Mathematics

Project Evaluation: Principles and Methods

The Application of Project Evaluation Methods

Risk and Return

The Capital Market

Sources of Finance: Equity

Sources of Finance: Debt

Payout Policy

Principles of Capital Structure

Capital Structure Decisions

The Cost of Capital and Taxation Issues in Project Evaluation

Leasing and Other Equipment Finance

Capital Market Efficiency

Futures Contracts

Options and Contingent Claims

Analysis of Takeovers

International Financial Management

Management of Short-Term Assets: Inventory

Management of Short-Term Assets: Liquid Assets and Accounts Receivable

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