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Fall 2009 Exam 2 - FIN 221 Fall 2009 Exam 2 Multiple Choice...

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FIN 221 Fall 2009 Exam 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT A. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. B. Over the next year, Bond 8’s price is expected to decrease, Bond 10’s price is expected to stay the same, and Bond 12’s price is expected to increase. C. Bond 8’s current yield will increase each year. D. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. E. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 2. Which of the following statements is CORRECT? 3. Mikkelson Corporation's stock had a required return of 13.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? 4. Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 20.5% and a beta of 0.80. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?
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