FINC 512

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 statements are correct concerning
municipal bonds?
I. Yields on municipal bonds are usually lower than
yields on Treasury bonds.
II. Municipal bonds are most appealing to individuals with
high incomes.
III. Interest on a municipal bond is exempt from federal
income tax.
IV. Municipal bonds are less risky than Treasury bonds.

A. I, II, III and IV

B. I, II and III only
C. II, III and IV only
D. II and III only

8. What is the coupon rate of an annual bond that has a yield

to maturity of 8.5%, a current price of $942.32, a par
value of $1,000 and matures in thirteen years?
A. 7.67%
B. 7.75%
C. 8.33%
D. 8.50%

9. What is the current price of a $1,000, 6% coupon bond that

pays interest semi-annually if the bond matures in ten
years and has a yield-to-maturity of 7.1325%?
A. $567
B. $920
C. $1,030
D. $1,080

10. Bonds with one of the top four ratings (Aaa through Baa, or
AAA through BBB) are designated as
A. split bonds.
B. investment grade bonds.
C. illiquid bonds.
D. high-yield bonds.

11. What is the yield-to-maturity of a $1,000, 7% semi-annual

coupon bond that matures in 2 years and currently sells for
$997.07?
A. 6.87%
B. 7.04%
C. 7.16%
D. 7.31%

12. Which one of the following statements is correct concerning

bond investors?
A. Aggressive investors want to lock in high interest
rates.
B. Aggressive investors purchase bonds when they believe
interest rates will rise.
C. Conservative investors seek capital gains.
D. Conservative investors buy bonds when interest rates
are high.

13. Which one of the following statements is true about a

$1,000, 6% annual coupon bond that is selling for $1,012?
A. The current yield is less than 6%.
B. The current yield is 6%.
C. The yield-to-maturity is greater than 6%.
D. The yield-to-maturity is 6%.
14. The yield curve depicts the relationship between a bond's
yield to maturity and its
A. duration.
B. term to call.
C. term to maturity.
D. volatility.

15. Which of the following are needed to determine the

appropriate value of a bond?
I. required rate of return
II. time to maturity
III. frequency of interest payments
IV. coupon rate

A. II and III only

B. III and IV only
C. II, III and IV only
D. I, II, III and IV

16. Yield-to-call is
A. commonly used for bonds with deferred-call provisions.
B. calculated using the time to call and the par value of
the bond.
C. based solely on the call premium and ignores interest
payments.
D. always less than the yield-to-maturity.

17. Based on the concept of bond duration, which one of the

following statements is correct?
A. Lower coupons result in shorter durations.
B. Longer maturities means shorter durations.
C. Higher yields (YTMs) lead to longer durations.
D. Longer durations mean greater volatility.

18. The main purpose of a bond ladder is to

A. lessen the effects of changes in interest rates.
B. achieve the highest level of capital gains possible.
C. maintain a highly liquid portfolio.
D. offset the effects of bond duration.

19. Which of the following is a good reason to invest in

convertible bonds?
A. They often have higher than normal coupon rates.
B. They offer protection against rising interest rates.
C. They tend to be issued by stable, low-risk companies.
D. They offer predictable income and a chance to profit
from an increase in the stock price.

20. A preferred stock

A. is always convertible into bonds at some point in
time.
B. has features of both debt and equity.
C. grants shareholders a right to the remaining profits
after common dividends are paid.
D. is granted a legal guarantee that all dividend
payments will be paid.

21. What is the market value of a 7%,$100 par value preferred

stock if the dividend yield is 8%?
A. $77.00
B. $87.50
C. $100.00
D. $114.29
22. To operate as a regulated investment company and enjoy the
related tax benefits, a mutual fund must annually
distribute to its shareholders
A. half of its realized capital gains, and interest and
dividend income.
B. none of its realized capital gains, but all of its
interest and dividend income.
C. all of its realized capital gains, and at least 90% of
its interest and dividend income.
D. all of its realized capital gains and interest and
dividend income.

23. The net asset value of a mutual fund increased from $12.03
to $13.53, but its price per share increased by only $1.26.
This information indicates that the fund
A. paid out $1 in capital gains.
B. paid out $1 in dividends.
C. is a closed-end fund.
D. is an open-end fund.

24. Which of the following statements is (are) correct

concerning exchange-traded funds (ETFs)?
I. You can buy and sell ETFs any time during trading
hours.
II. ETFs are actively managed.
III. ETFs have high portfolio turnover rates.
IV. ETFs rarely distribute any capital gains.

A. I, II and IV only
B. I and IV only
C. II and III only
D. I only

25. The commission charged when shares of an open-end mutual

fund are purchased is called a
A. management fee.
B. back-end load.
C. front-end load.
D. 12(b)-1 fee.

26. A long-term mutual fund investor should normally purchase

A. A shares.
B. B shares.
C. C shares.
D. any type of shares as the costs are the same over the
long term.

27. An aggressive growth mutual fund is least likely to

purchase a stock
A. with a high P/E ratio.
B. with a high anticipated rate of growth.
C. of an unseasoned firm.
D. with a high current yield.

28. One characteristic of most index funds is that such funds

typically
A. produce a large dollar amount of realized capital
gains every year.
B. have a very low-cost structure with respect to
management fees and transaction fees.
C. charge high front-end loads.
D. are designed to "beat the market."
29. A mutual fund is generally more tax efficient when it has
a _____ turnover rate and a _____ dividend yield.
A. low; low
B. low; high
C. high; low
D. high; high

30. Income distributed by a mutual fund from which one of the

following sources receives a preferential tax rate of 15%?
A. dividends on common stock
B. interest on bonds
C. dividends from most preferred stocks
D. dividends from REITs

31. Last year at this time, a mutual fund had an NAV of $13.20
per share. Over the past year the fund paid dividends of
$0.70 per share and had a capital gains distribution of
$1.20 per share. What is the holding period return
assuming that the current NAV is $14.42?
A. 13.2%
B. 14.4%
C. 21.6%
D. 23.6%

32. Fred and Martha are in their seventies and retired. Which
one of the following sets of portfolio statistics might
best suit their situation if their primary investment goal
is current income with limited risk?
A. beta of 0.83 and a dividend yield of 6.3%
B. beta of 0.86 and a dividend yield of 4.6%
C. beta of 1.6 and a dividend yield of 6.4%
D. beta of 1.1 and a dividend yield of 5.4%

33. Ten months ago, Junior purchased a stock for $14 a share.
The stock pays a quarterly dividend of $0.50 per share.
Today, Junior sold the stock for $15 a share. What is his
holding period return?
A. 10.0%
B. 10.7%
C. 16.7%
D. 17.9%

34. Which of the following are reasons to consider selling an

investment that is currently in a portfolio?
I. The investment has met the original objective.
II. Better investment opportunities currently exist.
III. The outlook for the investment has improved.
IV. The investment has not met expectations and no change
is expected.

A. I, II and IV only
B. I, III and IV only
C. I, II and III only
D. I, II, III and IV

35. Sharpe's measure of portfolio performance compares the risk

premium on a portfolio to
A. a broad-based market index such as the S&P 500 index.
B. the portfolio's standard deviation of return.
C. the portfolio's beta.
D. the prevailing risk-free rate of return.
36. Which one of the following statements is correct if a
portfolio has a Jensen measure of return of zero?
A. The portfolio has a total return of 0%.
B. The portfolio earned exactly its expected return on a
risk-adjusted basis.
c. The portfolio outperformed the market on a risk-
adjusted basis.
D. The market provides a better return on risk-adjusted
basis.

37. Dollar cost averaging is a procedure by which an investor

A. buys more stock as its price increases.
B. times investments in order to buy low and sell high.
C. invests a fixed dollar amount in a security at fixed
intervals.
D. maintains a constant ratio of conservative and
aggressive investments.

38. One important tax rule concerning capital losses is that

A. capital losses are always fully deductible.
B. a maximum of $3,000 of losses in excess of capital
gains can be written off against other income in
any one year.
C. a maximum of $10,000 of losses in excess of capital
gains can be written off against other income in
any one year.
D. capital losses are never deductible.

39. Purchasers of stock options

A. own a financial asset with benefits of firm ownership.
B. have a claim on the profits of the firm issuing the
underlying securities.
C. have the obligation to buy or sell a predetermined
amount of shares at the strike price.
D. have the right to buy or sell a certain number of
underlying shares.

40. Which of the following statements concerning options are

correct?
I. Options are derivative securities.
II. The value of an option is dependent upon the value of
the underlying security.
III. The seller of the option retains the option premium
whether or not the option is exercised.
IV. Options can provide leverage benefits.

A. II and III only

B. I, II and III only
C. I, II and IV only
D. I, II, III and IV

41. The maker of a put or call is the

A. company which issued the underlying security.
B. person who facilitates the trade on the floor of the
exchange.
C. party who writes the option.
D. party who decides whether or not the option is
exercised.
42. Grant purchased one call on XYZ stock at an exercise price
of $25. The market price of XYZ stock when Grant purchased
the call was $24 a share. XYZ is currently priced at $30 a
share. Grant paid $120 to buy the call. How much profit
will Grant make if he exercises the option today and then
sells the shares? Ignore all transaction-related costs.
A. $380
B. $480
C. $500
D. $600

43. The two provisions which investors should carefully

consider when evaluating stock options are the
A. strike price and the exchange ratio.
B. time until expiration and the strike price.
C. leverage ratio and the time to maturity.
D. premium and the discount.

44. The writer of a put

A. accepts the obligation to sell a predetermined number
of shares at a predetermined price.
B. is betting the price of the underlying security will
increase in value.
C. is hoping that the put will be in-the-money prior to
expiration.
D. will pay the premium whether or not the option is
exercised.

45. A put has fundamental value as long as

A. the market price of the underlying financial asset has
a positive value.
B. the market price of the underlying financial asset is
less than the strike price.
C. the strike price of the put is greater than the time
premium of the put.
D. the strike price of the put is less than the market
value of the underlying asset.

46. Which one of the following statements about margin trading

is correct?
A. The Federal Reserve sets the minimum margin
requirement for margin trading.
B. If Fred buys $1,000 worth of stock using 60% margin,
he will need to pay $400 in cash to make the
purchase.
C. Purchasing stocks on margin is less risky than
purchasing stocks by paying cash for the entire
purchase.
D. Margin trading increases the potential profits while
lowering the potential losses on a percentage
basis.

47. Jim purchased 100 shares of stock at a price of $32 a

share. He utilized his 80% margin account to make the
purchase. What is Jim's initial equity in this investment?
A. -$640
B. $640
C. $2,560
D. $3,200

48. Maintenance margin is the

A. minimum amount of the loan that can be used for margin
trading.
B. initial amount of equity required for a margin
purchase.
C. minimum amount of equity that an investor can have to
avoid a margin call.
 D. amount of additional funds that need to be added to an
account to meet minimal equity requirements.
49. Which of the following are characteristics of short
selling?
I. borrowing shares of stock from a brokerage firm or
other investors
II. selling shares of stock you do not own
III. betting the stock price will increase
IV. limiting loses per share to the price at which the
stock was sold

A. I and II only
B. III and IV only
C. I, II and IV only
D. I, II, III only

50. Mike owns 200 shares of HGF stock. The stock has traded in
a range of $21 to $44 a share over the past year.
Currently, HGF is selling for $43.60 a share. Mike feels
this is about the highest the price will go for a while so
decides to sell his shares. He places a limit sell order
for 200 shares at $44 a share. The stock price rises to
$43.90 a share and then immediately declines to $37 a share
on some bad news. Mike probably should have placed a(n)
A. market order.
B. GTC order at $44
C. fill-or-kill order at $44
D. stop-loss order at $43.00

51. The risk of a portfolio consisting of two uncorrelated

assets will be
A. equal to zero.
B. greater than the risk of the least risky asset but
less than the risk level of the more risky asset.
C. greater than zero but less than the risk of the more
risky asset.
D. equal to the average of the risk level of the two
assets.

52. Over the long term, a portfolio consisting of an S&P 500

index and an EAFE index will generally produce _____
returns and have _____ risk than a portfolio comprised
solely of the S&P 500 index.
A. higher; more
B. higher; less
C. lower; more
D. lower, less

53. A stock's beta value is a measure of

A. interest rate risk.
B. total risk.
C. systematic risk.
D. diversifiable risk.

54. The stock of ABC, Inc. has a beta of 1.10. The market rate
of return is expected to increase in value by 5%. ABC stock
should
A. increase in value by 0.5%.
B. increase in value by 5.5%.
C. decrease in value by 0.5%.
D. decrease in value by 5.5%.
55. Which one of the following statements is correct concerning
the constant-growth dividend valuation model?
A. An increase in the required rate of return will
increase the value of the stock.
B. An increase in the rate of growth of the dividends
will decrease the value of the stock.
C. The growth rate represents the total rate of return to
the shareholder.
D. The price of the stock will increase over time so long
as the discount rate and the growth don't change.

56. The primary emphasis of asset allocation is the

A. preservation of capital.
B. selection of individual securities within an asset
class.
C. maximization of current income.
D. maximization of short-term profits.

57. The holding period return (HPR)

A. reflects only capital gains and losses for investment
periods of one year or less.
B. calculates the annual dividend yield on stocks or
current interest yield on bonds.
C. is the most appropriate measure of returns for an
investment period exceeding one year.
D. can be used to determine the actual total return on
stocks, bonds, and other investments for periods
of one year or less.

58. For a stock investment, the dividend yield is calculated by

A. dividing a stock's annual cash dividend by its price.
B. dividing a stock's price by its annual cash dividend.
C. multiplying a stock's semi-annual dividend by two.
D. dividing the annual change in the stock's price plus
its annual dividend amount by the beginning of
the year price.

59. Juan's investment portfolio was valued at $125,640 at the

beginning of the year. During the year, Juan received $603
in interest income and $298 in dividend income. Juan also
sold shares of stock and realized $1,459 in capital gains.
Juan's portfolio is valued at $142,608 at the end of the
year. All income and realized gains were reinvested. No
funds were contributed or withdrawn during the year. What
is the amount of income Juan must declare this year for
income tax purposes?
A. $0
B. $901
C. $2,360
D. $19,328

60. An investor in the 25% marginal tax bracket purchased a

bond for $983, received $85 in interest, and then sold
the bond for $955 after holding it for six months. The tax
rate for capital gains with holding periods in excess of
one year is 15%. What are the pre-tax and post-tax
holding period returns?
A. 5.8%; 4.3%
B. 6.0%; 4.5%
C. 5.8%; 4.5%
D. 6.0%; 4.3%
61. Which of the following statements about Jensen's measure
are correct?
I. Through its use of the capital asset pricing model,
Jensen's measure automatically adjusts for market
return.
II. In general, the higher the Jensen's measure, the
better a portfolio has performed.
III. Jensen's measure is referred to as alpha.
IV. A positive Jensen's measure indicates an investment
has underperformed the market on a risk-adjusted
basis.

A. I and IV only
B. I, II and III only
C. II and III only
D. I, III and IV only

62. The Sharpe's measure for Jane Smith's investment portfolio

is 0.40, while the Sharpe's measure for the market is
0.30. This information suggests that Smith's portfolio
A. exhibits superior performance because its risk premium
per unit of risk is above that of the market.
B. exhibits poor performance because its risk premium per
unit of risk is below that of the market.
C. is inadequately diversified, and more securities
should be added to the portfolio in order to
bring it in line with the market.
D. is overly diversified, and some securities should be
sold to bring the portfolio in line with the
market.

63. Phil has a portfolio with a 13.2% total return. The beta of
the portfolio is 1.48 and the standard deviation is 13%.
Currently, the risk-free rate of return is 4% and the
overall market has a total return of 11%. What is the value
of Treynor's measure for Peter's portfolio?
A. 2.1%
B. 6.2%
C. 7.1%
D. 8.9%

64. A portfolio has a total return of 10.5%, a beta of 0.72 and

a standard deviation of 6.3%. The risk free rate is 3.8%,
the market return is 12.4%. Jensen's measure of this
portfolio's performance is
A. 0.5%.
B. 4.3%.
C. 7.9%.
D. 9.3%.

65. Which one of the following statements is correct if a

portfolio has a Jensen measure of return of zero?
A. The portfolio has a total return of zero percent.
B. The portfolio earned exactly its expected return on a
risk-adjusted basis.
C. The portfolio outperformed the market on a risk-
adjusted basis.
D. The market provides a better return on a risk-adjusted
basis.
66. The intrinsic value of a security is based on the
I. amount of risk.
II. current market value of the security.
III. discount rate applicable to the security.
IV. estimated future cash flows from the security.

A. I and III only

B. III and IV only
C. I, II and III only
D. I, III and IV only

67. Fundamental analysis involves the in-depth study of the

A. role of nondiversifiable risk in an investor's
portfolio.
B. financial condition and operating results of a given
firm.
C. pattern of security prices as revealed in chart
formations.
D. role of diversifiable risk in an investor's portfolio.

68. Financial ratios

I. allow comparisons across firms without concern over
firm size.
II. can compare a firm's operating and financial status to
industry norms.
III. reflect the future outlook of a firm based on analysts
projections.
IV. look at the liquidity, activity, leverage,
profitability and market measures of a firm.

A. II and IV only
B. I and II only
C. I, II and IV only
D. I, II, III and IV

69. On September 30, the Simpson Company reported the following

information on its financial statements.
________________________________________
Total current assets $650,000
Total long-term assets $1,080,000
Total current liabilities $684,000
Total long-term debt $803,000
________________________________________

What is the amount of the stockholder's equity in the

Simpson Company?
A. $243,000
B. $277,000
C. $927,000
D. $3,217,000

70. A company has sales of $640,000, net profit after taxes of

$23,000, and a total asset turnover of 2.5. What is the
return on assets?
A. 3.6%
B. 4.5%
C. 8.1%
D. 9.0%
71. A company has annual sales of $160 million, a net profit
margin of 4%, and total assets of $90 million. It carries
$10 million in accounts receivable, $25 million in
inventory, has $55 million in total debt, and 5 million
shares of common stock outstanding. Based on this
information, the company's return on equity (ROE) is
A. 4.4%.
B. 7.1%.
C. 11.5%.
D. 18.3%.

72. If a company's ROA is high, then an investor can assume

that the company
A. is in danger of defaulting on its loans.
B. pays a high dividend.
C. is profitable.
D. has more equity than debt in its capital structure.

73. Kim has gathered the following information on a company.

__________________________________________
Sales $640,000
Dividends Paid on Common Stock $ 18,000
Net Profit Margin 5%
Number of Shares Outstanding 128,000
__________________________________________

What is the amount of the earnings per share?

A. $0.14
B. $0.25
C. $0.28
D. $0.30

74. A company has 2 million shares of common stock outstanding.

Annual sales are $26 million. The net profit margin is 8%
and the dividend payout ratio is 40%. Currently the stock
trades at $17.68 per share. Given this information, the
company has a P/E ratio of
A. 16 and a dividend yield of 2.35%.
B. 16 and a dividend yield of 3.20%.
C. 17 and a dividend yield of 2.35%.
D. 17 and a dividend yield of 3.20%.

75. The PEG ratio

A. preferred by investors is equal to 2.0 or higher.
B. compares the price/earnings ratio to the rate of
growth of the company's earnings.
C. is a measure of a firm's liquidity.
D. measures the ability of a firm's assets to generate
growth for the firm.

76. To determine whether a pharmaceutical company's

profitability ratios indicate strength or weakness, we
should
I. compare them to others in the same industry.
II. compare them to companies in unrelated industries such
as energy or banking.
III. compare them to previous years.
IV. compare them to absolute standards established by the
CFA Institute.

A. I and II only
B. I and III only
C. III and IV only
D. IV only
77. Which of the following will most directly influence a
company's market value?
A. The state of the economy.
B. The book value of its assets.
C. The use of financial leverage.
D. Its future cash flows.

78. The current annual sales of Flower Bud, Inc. are $178,000.
Sales are expected to increase by 4% next year. The company
has a net profit margin of 5% which is expected to remain
constant for the next couple of years. There are 10,000
shares of common stock outstanding. The market multiple is
16.4 and the relative P/E of the firm is 1.21. What is the
expected market price per share of common stock for next
year?
A. $15.18
B. $17.66
C. $18.37
D. $19.29

79. Markhem Enterprises is expected to earn $1.34 per share

this year. The company has a dividend payout ratio of 40%
and a P/E ratio of 18. What should one share of common
stock in Markhem Enterprises be selling for in the market?
A. $9.65
B. $14.47
C. $24.12
D. $33.77

80. An investor should purchase a stock when

A. the market price exceeds the intrinsic value.
B. the expected rate of return equals or exceeds the
required return.
C. the capital gains rate is less than the required
return and no dividends are paid.
D. the market price is greater than the justified price.

81. Winifred, Inc. paid $1.64 as an annual dividend per share

last year. The company is expected to increase their annual
dividends by 3% each year. How much should you pay to
purchase one share of this stock if you require a 9% rate
of return on this investment?
A. $18.22
B. $18.77
C. $27.33
D. $28.15

82. The Frisco Company just paid $2.20 as its annual dividend.
The dividends have been increasing at a rate of 4% annually
and this trend is expected to continue. The stock is
currently selling for $63.60 a share. What is the rate of
return on this stock?
A. 3.46%
B. 3.60%
C. 7.46%
D. 7.60%

83. Mardt's, Inc. just announced that they will be paying a

$1.80 per share as an annual dividend next year and that
the dividends will then be increasing by 2.5% annually
thereafter. The common stock of Mardt's is currently
selling at $18.95 a share. What is the dividend yield on
this stock?
A. 7.0%
B. 9.5%
C. 10.5%
 D. 12.0%

84. In general, the higher the retention ratio

A. the higher the future growth rate of the company.
B. the higher the dividends per share of common stock.
C. the higher the future debt-equity ratio.
D. the lower the future book value per share.

85. Technical analysts consider the stock market to be strong

when volume __________ in a rising market and __________
during a declining market.
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases

86. According to chartists, a breakout below a support level

A. is a sell signal.
B. is a signal that the market is stagnant.
C. is a buy signal but only for value investors.
D. is a buy signal.

87. Which one of the following statements is correct concerning

moving averages?
A. The longer the time period under consideration, the
more sensitive the moving average is to daily
price fluctuations.
B. A simple moving average is computed as the arithmetic
mode.
C. The shorter the time period under consideration, the
easier it is to spot long-term price trends.
D. A moving average helps remove short-term fluctuations
from the analysis.

88. An efficient market reflects

A. only historical information.
B. only the information related to events that have
already occurred.
C. all publicly known information related to past events
and announced future events.
D. all information including predictions about future
information.

89. Followers of the efficient market hypothesis believe that

A. very few investors actually analyze or evaluate stocks
before they make a purchase decision.
B. the needed information to assess the market is
available only to corporate insiders.
C. investors react quickly and accurately to new
information.
D. individual traders can have a significant impact on
the price of a security.

90. People tend to

A. ignore information that contradicts their current
beliefs.
B. overestimate the effects of random chance.
C. be underconfident in their judgment of investments.
D. look at the entire situation when analyzing an
individual security.