Devry FIN 385 Week 4 Midterm Exam Answers

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Devry FIN 385 Week 4 Midterm Exam Answers


Question 1. Question : (TCOs 3, 4) What is the primary role of investment bankers?

To help guide a company seeking to go public through the entire process of filing with the SEC and the eventual sale of the security
To guide a company in making the best capital investment choices
To always buy 100% of the security from the offering company to keep in its own portfolio
None of the above

Question 2. Question : (TCO 2) Which statement is true about nominal versus real interest rates?

Real interest rates are always higher than nominal rates.
Nominal rates must always be higher than real interest rates.
Nominal rates include inflation while real interest rates do not.
None of the above

Question 3. Question : (TCO 2) A simple diversified portfolio to reduce risk might have which of the following stocks?

A jet fighter firm and a tank manufacturer
Oil company and oil tanker company
Airline company and a pharmaceutical company
Wal-Mart and Target

Question 4. Question : (TCO 2) An investor’s investment opportunity set _______.

is a list of the all good stocks he or she has the opportunity to buy below par
is always lowest when risk is maximized
contains numerous combinations of risk and return on bonds
contains numerous combinations of risk and return from the securities available to the investor

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Question 5. Question : (TCO 2) What does the reward to variability ratio refer to?

The amount of added return that investors expect for an added amount of risk
A measure of a security’s variability of returns
Profit as a percentage of sales
A measure of profit/standard deviation of returns

Question 6. Question : (TCO 2) Which of the following can be said about average bond versus stock returns over the long run?

They have been about equal.
Bonds have averaged about a 6% return and stocks about 5%.
Bonds have averaged about 11.2% and stocks 10.2%.
Bonds have averaged about 6% and stocks about 11%.

Question 7. Question : (TCO 2) If more securities lower a portfolio’s risk, then _______.

a portfolio should have hundreds of stocks in it
it should just need two different securities in it
it would be best to have 1,000 different securities in it
having more than about 100 different stocks doesn’t reduce risk much more

Question 8. Question : (TCO 8) What is an important concept for managing inventory levels?

Bottom-up stacking
Electronic order tags
Fast shipping
Economic order quantity

Question 9. Question : (TCO 1) In the purchase and sale of securities, the “spread” refers to the difference between _______.

the IPO offering price and what larger investors are willing to pay
a stock’s par value and its strike price
a preferred stock’s par value and its conversion value
what a dealer pays for a share and what he or she sells it for

Question 10. Question : (TCO 1) If the bid price of a bond is 90 8/32, it means that a bidder is offering ____.

None of the above

Question 11. Question : (TCO 1) The dollar value of all forms of bonds issued over the last several years has approached approximately _____.

$16 million
$16 billion
$16 trillion
$3.8 billion

Question 12. Question : (TCO 1) Which of the following is not true about corporate bonds?

They usually pay semiannual or annual interest.
Some bonds may be issued with callable or convertible features.
They are pretty risk free.
Their interest is taxable unlike municipal bonds.
They are the primary method private firms use to raise money from external sources.

Question 13. Question : (TCO 1) In terms of assessing a corporate bond’s risk of default, what would be the proper order in terms of decreasing risk of default?

Callable bonds, convertible bonds, preferred stock
Unsecured bonds, subordinated debentures, secured bonds
Secured bonds, subordinated debentures, unsecured bonds
None of the above

Question 14. Question : (TCO 5) Which is true about callable bonds?

They are of great benefit to the bondholder and the investor.
They could be of great value to the bondholder during a time of rising interest rates.
They could be of benefit to the issuing company during a time of falling interest rates.
None of the above

Question 15. Question : (TCO 5) The typical trade-off in terms of deciding on a good credit policy is between _______.

increased sales and increased profits
decreased sales and increased bad debt
increased sales and increased bad debt
decreased collection time and delinquent accounts

Question 16. Question : (TCO 5) What is Gross Domestic Product or GDP?

The same as Gross National Product
A measure of the economy’s capacity utilization
A measure of the economy’s national wealth
A measure of the total output of goods and services of the economy

Question 17. Question : (TCO 5) Sector rotation would be of importance to ______.

individual investors
mutual fund managers
None of the above
Answers 1 and 2

Question 18. Question : (TCO 5) What is the normal yield curve shape?

Humped in the middle
Downward sloping to the right
Upward sloping to the right
None of the above

Question 19. Question : (TCO 5) As business people, why do we study macroeconomics?

Because it’s bigger than microeconomics
Because it can help predict changes in inflation
Because it can help us forecast how economic changes could affect certain industries more than others
Because we can predict our companies’ sales easier this way

Question 20. Question : (TCO 5) Which of these statements is true about inflation?

Inflation has nothing to do with rising prices.
Usually, the lower the unemployment level, the higher the rate of inflation.
Usually, the higher the unemployment level, the higher the rate of inflation.
Inflation is not related to the unemployment rate.

Question 1. Question : (TCO 2) Semitool Corp has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool’s return responds by a factor of 1.4. Suppose it turns out that the economy and the stock market do better than expected by 2% and Semitool’s products experience more rapid growth than anticipated, thus pushing up the stock price by another 1%. Based on this information, what was Semitool’s actual excess return?

Question 2. Question : (TCO 2) What is the expected return of the three-issue portfolio with the following characteristics?
Issue Expected Return Standard Deviation Weight
A 15% 22 .5
B 10% 8 .4
C 6% 3 .1

Question 3. Question : (TCO 5) The nominal interest rate is 6% and the inflation rate is 4%. What is the exact real interest rate?

Question 4. Question : (TCO 5) Calculate the appropriate selling price of a 30-year 6% annual coupon paid semiannually, $1,000 corporate bond that was purchased five years ago. Marketplace interest rates are averaging 8%.

Question 5. Question : (TCO 6) What is the interest rate needed on a $1,000 face value 5% coupon corporate bond in order to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 30%.

Question 6. Question : (TCO 8) Using the security market line formula rather than the dividend discount formula, determine the expected return on a firm’s common stock when
(a) beta = 1.2;
(b) the risk free rate is 6%; and
(c) marketplace interest rates have hovered around 13%.

Question 7. Question : (TCO 6) You bought a $1,000 bond at a YTM of 10%. It has an 8% coupon that is paid semiannually and a 20-year maturity. The trade settled two days ago and the most recent coupon payment occurred 32 days ago. What was the invoice price that you were required to pay?

Question 8. Question : (TCO 2) Find the expected return and variance of a two-asset portfolio, 75% bonds and 25% stocks. The expected return is 6% for bonds and 10% for stocks. The variances are 12% for bonds and 25% for stock. Assume that the correlation coefficient between bonds and stock = 0.


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