Chapter 3 Exercises
End of Chapter
1. Forward Rate.
a. Assume that as of today, the annualized two-year interest rate is 13 percent, while the
one-year interest rate is 12 percent. Use only this information to estimate the oneyear forward rate.
ANSWER:
(1

Quiz 1 (Ch. 1 & 2)
1. The Fisher effect states that the nominal interest rate equals the expected inflation rate plus
the real rate of interest.
2. If the aggregate demand for loanable funds increases without a corresponding increase in
aggregate supply,

Test 1 (Ch. 1, 2, 3 & 6)
1. Savings institutions are the most dominant financial institution. False
2. Equity securities have a higher expected return than most long-term debt securities, and
they exhibit a higher degree of risk.
3. When a depository inst

Ch. 17, 21 & 25 Quiz
If a savings institutions assets have considerably longer duration than its liabilities, it can
reduce its exposure to interest rate risk by increasing its proportion of liabilities in the
long duration category.
For savings instituti

Exam 3 (Ch. 10, 11, 12)
1. Venture capital (VC) funds typically plan to exit from their original investment within a
period of about one year. False
2. A cumulative provision requires that dividends cannot be paid on common stock until all
currency and pr

Quiz 3 (Ch. 7 & 8)
The market value of long-term bonds is very sensitive to interest rate movements; as
interest rates fall, the market value of long-term bonds rises.
To determine the present value of a bond that pays semiannual interest, which of the
fo

Ch. 10 & 11 Quiz
A firm has a current stock price of $15.32. The firms annual dividend is $1.14 per share.
The firms dividend yield is 7.44%.
IPOs tend to occur more primarily during recessions. False
Initial public offerings (IPOs) tend to occur more fre

Test 2 (Ch. 7, 8, 9)
1. If the Treasury issues an unusually large amount of bonds in the primary market, it
places downward pressure on bond prices, and upward pressure on yields to be earned
by investors that purchase bonds and plan to hold them to matur

1. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay
$25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the
investor setlls the stock for $55 at the end

Yield to Maturity/Yield Curve
Let us assume that we have 4 zero-coupon bonds, each with a par value of $1000, as follows:
1-year bond with a market price of $925.93
2-year bond with a market price of $841.75
3-year bond with a market price of $758.33
4-ye

Chapter 11/Stock Valuation and Risk 107
Chapter 11: Stock Valuation and Risk
Questions
1. Price-Earnings Model. Explain the use of the price-earnings (PE) ratio for valuing a stock. Why
might investors derive different valuations for a stock when using th

Problems
1. The Robinson family has asked for a 20-year mortgage in the amount of $60,000 to
purchase a home. At a 10 percent loan rate, what is the required monthly payment?
$60,000 * 0.10/12 * (1 0.10/12) 20*12
$579.01
(1 0.10/12) 20*12 - 1
or use a fin

1. A corporate bond currently carries a yield to maturity of 12 percent for a maturity of 5 years.
The bond pays $100 in annual interest. If the bond has a par value of $1,000 its duration can be
found from:
$100x1
$100x2
$100x3
$100x4
$1100x5
/ $927.90

Problem 1:
Consider the following example: Martin buys 200 shares of MBIA stock at 32 3/4, on
margin. The initial margin requirement is 50%. If the stock price should drop far
enough, Martin would receive a margin call. How low can the price drop without

Ch. 7 & 8 Quiz
The market value of long-term bonds is very sensitive to interest rate movements; as
interest rates fall, the market value of long-term bonds rises.
To determine the present value of a bond that pays semiannual interest, which of the
follow