Finance Fin

Sample Final Exam

Name:___________________________________________

1. Which of the following are advantages of owning bonds?

I. diversification properties

II. higher long-term returns than equity holdings

III. current income

IV. relatively low risk

A. I and II only

B. I, III and IV only

C. I, II and III only

D. I, II, III and IV

2. The bond market is considered bearish when

A. market interest rates are low or falling.

B. market interest rates are high or rising.

C. the risk-free rate of return exceeds the required rate of return.

D. more bonds are called than issued over a given period of time.

3. The Franklin Company issued a 6% bond three years ago at par value. The market interest rate on comparable bonds today is 5%. The Franklin Company bond currently pays ____ a year in interest and the bond sells at a _____.

A. $60; discount

B. $60; premium

C. $50; discount

D. $50; premium

4. At the time you purchase a bond, you know the exact holding period return you will earn if

A. the bond is called at any time prior to maturity.

B. you resell the bond in exactly one year from the date of purchase.

C. the market rate of interest declines within the next year.

D. you hold the bond to maturity.

5. Which one of the following combination of features causes bond prices to be the most volatile?

A. low coupon, short maturity

B. high coupon, short maturity

C. low coupon, long maturity

D. high coupon, long maturity

6. Which of the following statements are correct concerning yield-to-maturity (YTM)?

I. YTM considers both interest income and price appreciation.

II. YTM assumes the bond is called at the earliest possible date.

III. YTM is a compounded rate of return.

IV. YTM assumes all interest payments are reinvested at the YTM rate.

A. I and IV only

B. I, III and IV only

C. II, III and IV only

D. I, II and III only

7. Which of the following...