PFM EXAM 2 QUESTIONS & ANSWERS
Bob has $1500 invested in a bank that pays 4% annually. How many years will it take
for his funds to double? - ANSWER I = 4%
PMT = ?
PV = 1500
FV = 1500 * 2 = 3000
17.67
Assume that the risk free rate is 4% and the market risk premium is 6%. What is the
required rate of return on a stock with a beta of .8? - ANSWER rrf + beta (rm - rrf)
4% + .8 (6 - 4)
= 5.6
What is the future value of 12 equal annual payments of $545 if your required return is
7% - ANSWER N = 12
I = 7%
PMT = -545
PV = 0
FV = ?
FV = 9,749.21
Which of the following statements is CORRECT, assuming positive interest rates and
holding other things constant? - ANSWER A bank loans nominal interest rate will
always be equal to or greater than its effective annual rate
When adding a randomly chosen new stock to an existing portfolio, the higher (or more
positive) the degree of correlation between the new stock and stocks already in the
portfolio, the less the additional stock will reduce the portfolio's risk. - ANSWER True
A stock beta measures its diversifiable risk relative to the diversifiable risks of other
firms - ANSWER False
If the required rate of return on a bond (rd) is greater than its coupon interest rate, and
the bond has several years left until maturity, then the market value of the bond will be
below its par value. - ANSWER True
Majority voting makes it easier to ensure that minority shareholders can elects at least
one board member - ANSWER
Logan Corp issues a non-callable bond that has 16 years to maturity, an 7% semi -
annual coupon and a $1,000 par value. Your require return on the Logan Corp Bond is
9%; If you buy it you plan to hold it for 4 yrs. You (and the market) have expectations
Bob has $1500 invested in a bank that pays 4% annually. How many years will it take
for his funds to double? - ANSWER I = 4%
PMT = ?
PV = 1500
FV = 1500 * 2 = 3000
17.67
Assume that the risk free rate is 4% and the market risk premium is 6%. What is the
required rate of return on a stock with a beta of .8? - ANSWER rrf + beta (rm - rrf)
4% + .8 (6 - 4)
= 5.6
What is the future value of 12 equal annual payments of $545 if your required return is
7% - ANSWER N = 12
I = 7%
PMT = -545
PV = 0
FV = ?
FV = 9,749.21
Which of the following statements is CORRECT, assuming positive interest rates and
holding other things constant? - ANSWER A bank loans nominal interest rate will
always be equal to or greater than its effective annual rate
When adding a randomly chosen new stock to an existing portfolio, the higher (or more
positive) the degree of correlation between the new stock and stocks already in the
portfolio, the less the additional stock will reduce the portfolio's risk. - ANSWER True
A stock beta measures its diversifiable risk relative to the diversifiable risks of other
firms - ANSWER False
If the required rate of return on a bond (rd) is greater than its coupon interest rate, and
the bond has several years left until maturity, then the market value of the bond will be
below its par value. - ANSWER True
Majority voting makes it easier to ensure that minority shareholders can elects at least
one board member - ANSWER
Logan Corp issues a non-callable bond that has 16 years to maturity, an 7% semi -
annual coupon and a $1,000 par value. Your require return on the Logan Corp Bond is
9%; If you buy it you plan to hold it for 4 yrs. You (and the market) have expectations
