Exam 2 Solutions - Fall 2002 Exam 2 1 Which of the...

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Fall 2002 Exam 2 1. Which of the following statements is incorrect (least correct)? A. If investors prefer to lend short-term and firms prefer to borrow long-term, then firms might have to offer a maturity risk premium to get investors to hold long- term bonds. * B. Even with a downward sloping yield curve, a 4-year US Treasury Security will always have a lower yield than a 30-year corporate security. C. If the Liquidity Preference Theory of the Term Structure is correct, then an upward-sloping yield curve does not necessarily indicate that investors expect one-year spot rates to increase in the future. D. A 4-year zero-coupon Treasury Security will always have a lower yield than a 4- year, zero-coupon corporate security. E. One of the ways that the Federal Reserve has to try and keep inflation in check is to tighten the money supply and increase interest rates. 2. Which of the following statements is incorrect (least correct)? A. When using regression analysis on historical data to determine a security’s beta, the returns for the security (dependent variable) are regressed against the returns for the market (independent variable). The resulting slope coefficient is equal to beta. B. Just because a stock has a negative beta does not necessarily mean that its expected return must also be negative. C. The slope of the security market line defines the degree of investors’ risk aversion. If investors become more risk averse, the slope of this line will increase. * D. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the “market risk” from the portfolio. E. It is quite simple to convert a variance/covariance matrix into a correlation matrix, since all the data that is needed to do this is already embedded within the variance/covariance matrix. 3. Which of the following statements is incorrect (least correct)? * A. For an installment loan, the amount of interest paid each period will increase, whereas the amount of principal paid will decrease. Thus, the total payment each period, as shown on an amortization schedule, will remain the same. B. If annual compounding is used, then annual nominal rates will be equal to annual effective rates. C. The present value of an N-period annuity (cash flows in Periods 1 through N), evaluated as of Period 0, may be found as the difference between a perpetuity with its first cash flow in Period 1 and a perpetuity with its first cash flow in Period N+1, as long as both perpetuities are evaluated as of Period 0. D. If compounding is more frequent than once per year, then periodic rates will be less than annual nominal rates. E. The future value of an N-period annuity (cash flows in Periods 1 through N), evaluated as of Period N, may be found as the difference between a perpetuity FIN 3403 - 2002 Fall Term - Exam 2 Page 1 of 10 Pages
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with its first cash flow in Period 1 and a perpetuity with its first cash flow in Period N+1, as long as both perpetuities are evaluated as of Period N. 4.
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This note was uploaded on 02/09/2011 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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Exam 2 Solutions - Fall 2002 Exam 2 1 Which of the...

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