1.

The amount of gain (or loss) to a speculator who initially purchased futures would generally be larger than
the loss (gain) to a speculator who initially sold futures on the same date (assuming zero transaction costs).
True
False

2.An increase in interest rates will cause the value of a bond to increase.
True
False

3.Technical analysis is valuing stocks, which involves the analysis of a company's operations to assess its
economic prospects.
True
False

4.The conversion value is the value of a convertible security as measured by the market price of the common
stock into which it is converted.
True
False

5. To determine the present value of a bond that pays semiannual interest, which of the following adjustments
should not be made to compute the price of the bond?
a. the annualized coupon should be split in half
b. the annualized discount rate should be divided by 2
c. the number of periods should be doubled to reflect two times the number of annual periods
d. the par value should be split in half
e. all of the above adjustments have to be made

7.A mortgage allowing the mortgage interest rate to adjust to market conditions
a. balloon payment mortgage
b. adjustable-rate mortgage
c. fixed rate mortgage
d. graduated payment mortgage

8.A negative cost of carry indicates that the cost of financing is less than the yield earned from dividends.
True
False

9.In an efficient marketplace, the intrinsic value of a security will equal its market value.
True
False

10.An investment strategy by which investors create a bond portfolio that will generate periodic income that
can match their expected periodic expenses.
a. interest rate strategy
b. barbell strategy
c. laddered strategy
d. matching strategy

11.If the market is in equilibrium, the expected rate of return and the required rate of return
a. will be different
b. have no relationship to each other
c. cannot be determined
d. will be the same

12.The option involved in convertible preferred stock belongs to the corporations issuing the shares.
True
false
13. If managers believe that their firm's stock price is weak because its stock is undervalued by the market, they
may consider repurchasing a portion of the shares that are outstanding as opposed to issuing new shares.
True
False

14. A stock order with a limit on the price at which a stock can be purchased or sold.
a. market maker
b. limit order
c. market order
d. margin requirements

15. Financial institutions that forecast bond yields and that plan to sell the bond at maturity must first forecast
interest rates for the point in time when they plan to sell their bonds in order to determine the yield to maturity.
True
False

16.Which of the following is false with respect to initial public offerings (IPOs)?
a. IPOs are first- time offerings of shares by a specific firm to the public.
b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue
and the asking price for the stock.
c. firms engaging in IPOs are normally not well known to investors.
d. IPOs occur more frequently when other investment opportunities are very attractive.
e. all of the above are true.

17. When two securities have the same expected cash flows, the value of the _________ security will be lower
than the value of the __________ security.
a. high- risk; low- risk
a. low- risk; high- risk
b. high- risk; high- risk
c. low- risk; low- risk

18. The par value of a bond is essentially dependent of the market value of a bond.
True
False

19. The preemptive right entitles the current shareholders to get the first opportunity to purchase new stock
issues.
True
False

20. Financial institutions that originate mortgages may prefer to reduce their holdings of _______ mortgages if
interest rates are expected to increase.
a. second
a. pass-through
c. adjustable rate
b. fixed rate.

21.The expected rate of return is equal to the required rate of return of bondholders who are willing to pay the
present market price for the bonds.
True
False

22.The appropriate price of a bond is simply the sum of the cash flows to be received.
True
False
23.A firm may especially benefit from acquisitions when its own stock price has declined.
True
False

24.Which of the following is not a factor that affects the risk- free rate?
a. money supply
b. budget deficit
c. the current yield to maturity on outstanding bonds in the economy
d. inflationary expectations
e. economic growth

25. If the stock price declines by the time the short- seller purchases it in the market in order to return it to the
broker, the short seller earns a profit.
True
False

26.The market price of a bond is affected by the timing of the payments made to bondholders
True
False

27.The sensitivity of bond prices to changes in the required rate of return.

a. present value interest factor
b. bond price elasticity
c. annuity
d. duration

28.A relatively high percentage of the ratio of the number of shares sold short divided by the total number of
shares outstanding suggests a large amount of short positions in the market, which implies that a relatively large
number of investors expect the stock's price to decline.
True
False

29.A financial institution that hedges with interest rate futures is less sensitive to economic events.
True
False

30. Bond ratings are favorably affected by all except:

a. taking more advantage of financial leverage
b. large firm size
c. profitable operations
d. low variability in past earnings

31.Valuation does not support the financial officer's objective of maximizing value of the firm's common stock.
True
False

32.The current yield on a bond refers to?

a. the interest payments due within the next year
b. the coupon rate of interest
c. the interest earned in the current period.
d. the ratio of the annual interest payment to the bond's market price

33. During the early years of a mortgage

a. most of the monthly payment reflects principal reduction
b. most of the monthly payments reflects interest
c. about half of the monthly payment reflects interest
d. cannot answer without more information
34. Which of the following is not a difference between purchasing an option and purchasing a futures contract?
a. the option requires that a premium be paid in addition to the price of the financial instrument.
b. the fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not.
c. owners of options can choose to let the option expire on the so- called expiration date without exercising
it.
d. all of the above are differences between purchasing an option and purchasing a futures contract.

35. Circuit breaker basically guarantee that prices will turn upward.
True
False

36. Elliot Wave theory is based on the belief that market movements are analogous to movements of the sea.
True
False

37. Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the
funds to purchase municipal bonds. Also, assume that the company is concerned that interest rates decrease
before the purchase date, which would make the municipal bonds more expensive. In order to hedge against
this possibility, the company should _______________ MBI future contracts. If interest rates decrease, the
future contract will generate a ___________.
a. sell; loss
b. sell; gain
c. purchase; gain
d. purchase; loss

38. Bond valuation depends on all but?

a. when the loan was issued
b. the amount of cash flows to be received.
c. the investors required rate of return
d. the maturity date of the loan

39.Strong economic growth tends to place downward pressure on interest rates, while weak economic
conditions place upward pressure on rates.
True
False

40.When the market interest rate rises above the stated interest rate of a bond, the bond
a. will sell at its par or stated value
b. will not sell because investors can receive a better return from the market
c. will sell at a premium
d. will sell at a discount

41. Which of the following is not a reason to consider the acquisition of another firm?
a. the combination of the two firms may reduce the redundancy in some operations and allow for
synergistic benefits
b. The sum of the two separate entities is greater than the value of the combination.
c. a merger may capitalize on tax shields that would not be applicable for the individual entities.
d. A merger may allow for the replacement of inefficient management and therefore improve the firm’s
operations.
e. all the above are reasons to consider the acquisition of another firm.

42. Following are the source of equity, except

a. leverage buyout
b. private equity funds
c. venture capital funds
d. international mutual funds
53.Firms are more willing to issue new stock in a secondary stock offering when the market price of their
outstanding shares is relatively_______
a. high
b. low
c. Moderate
d. either high or low, depending on the overall market

54.Which of the following is incorrect?

a. if the coupon rate of a bond is below the investor's required rate of return, the present value of the bond
should be below the par value
b. if the coupon rate of a bond is below the investor's required rate of return, the present value of the
bond should be above the par value
c. if the coupon rate of a bond is above the investor's required return, the present value of the bond should
be below the par value
d. if the coupon rate of a bond is equal to the investor's required return, the present value of the bond
should be equal to the par value
e. all of the above are correct

55. An increase in either the risk free rate or the general level of the risk premium on bonds results in a higher
required rate of return and therefore causes bond prices to increase.
True
False

56.Which of the following is not true with respect to preferred stock?

a. preferred stock usually does not allow for significant voting rights.
b. If the firm does not have sufficient earnings from which to pay preferred stock dividends, the preferred
shareholders may force the firm into bankruptcy.
c. Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated
fixed annual dividend.
d. payment of preferred dividends is not a tax-deductible expense.
e. all of the above are true.

57.Everything else being equal, which of the following bond ratings is associated with the highest yield
a. A
b. Baa
c. Aaa
d. Aa

58.If the market price of a security is larger than the value assigned to the security by an investor, then the
expected rate is greater than the required rate of return.
True
False

59. Borrowers who have a lower level of income relative to the periodic
loan payments are more likely to default on their mortgages.
True
False

60. Consider a well- diversified portfolio. If all individual stocks in the portfolio have positive betas, the stock
portfolio will be favorably affected by substantial market declines.
True
False

62.The annual peso amount of dividends paid can be determined by multiplying the dividends per share times
the number of shares outstanding.
True
False
63.Financial institutions with interest rate- sensitive liabilities that invest heavily in domestic bonds are
exposed to exchange rate risk.
True
False

64.An advantage of preferred stock over common stock is the regular interest payments that must be paid
before dividends can be paid to common stockholders.
True
False

65.A sinking fund provision requires the firm to pay all unpaid preferred stock dividends before any common
stock dividends are declared.
True
False
Computation:

1. A government bond pays a coupon rate of 5% and a yield of 4%, reaches maturity in 2022. The coupon is paid
semiannually on January 1, 2020, and July 1, 2020. Suppose the investor buys the bond on May 1, 2020, for a
price of P2,000, how much is the dirty price?

2.A firm has outstanding convertible preferred stock with a P60 par value which is convertible into 4 shares of
common stock. The conversion value is P40. The current market price of a share of common stock is ______

3.Kevin Sanchez, a private investor, would like to purchase stock priced at P70. The stock is not expected to pay
any dividends in the coming year. Mr. Sanchez can either pay the entire amount and purchase the stock or
borrow P35 from his brokerage firm at an annual interest rate of 12% and pay the remainder. Mr. Sanchez thinks
he can sell the stock for P100 after one year. If Mr. Sanchez does not borrow any money from his brokerage
firm, what is the estimated return on the stock? 42.86%

4. Assume a firm that is valued at P800 million with P6 million shares of stock outstanding. This firm's stock
should have a price of P________ per share. 133.33

5. The most recent dividend paid By Geron on its common stock was P1.50 (annual). The required rate of return
for the security is 6%. Growth is anticipated to be at 4% annually. The market price of the stock should be: 78

6. Mrs. Kaye expects Cisco stocks to decrease from its current price of P96 per share. Thus, Kaye purchases a
put option on Cisco stock with an exercise price of P93 for a premium of P3 per share. Just before the expiration
date, Cisco stock rises to P97. Kaye's profit (loss), assuming she prefers more money to less, is P________ per
share.

7. Kevin Sanchez, a private investor, would like to purchase stock priced at P70. The stock is not expected to pay
any dividends in the coming year. Mr. Sanchez can either put up the entire amount and purchase the stock or
borrow P35 from his brokerage firm at an annual interest rate of 12% and put up the remainder. Mr. Sanchez
thinks he can sell the stock for P100 after one year. If Mr. Sanchez borrows from his brokerage firm, what is the
estimated return on the stock? 73.71%

8. Cauldron Inc manufactures tennis balls. Cauldron just paid a dividend of P4.76 per share and plans to pay a
dividend of P5 per share next year, which is expected to increase by 3% per year subsequently. The required
rate of return is 15%. The value of Cauldron stock, according to the dividend discount model is P_______.

9. Mrs. Kaye expects Cisco stocks to decrease from their current price of P96 per share. Thus, Kaye purchases a
put option on Cisco stock with an exercise price of P93 for a premium of P3 per share. Assuming that the price
of Cisco stock is P88 just before the expiration date. Kaye's gain on her transaction would be P______ per share,
assuming she purchases Cisco share in the open market and then exercises her option.

10. For a P1,000 par- value bond carrying an 8% coupon (interest paid quarterly) and having a 10% yield to
maturity, the quarterly interest payments would be: 20

11. John Dee purchases P1,000 par value bond with a 12% coupon rate and a 9% yield to maturity. Mr. Dee will
hold the bonds until maturity. Thus, he will earn a return of ________(%).
9 | .09 | 9%

12. Martin Morece, a private investor, is contemplating the purchase of a P1,000 par value bond that pays semi-
annual interest. The bond has a coupon rate of 14% and the yield to maturity on the bond is 12%. Furthermore,
the bond ha twenty years remaining to maturity. How much did Mr. Morece pay for the bond? 1150.46