Question 1

Suppose the cash flows for a bond's coupon payment for years 1 through 4 are $100. That is, CFt = $100 for t (t = 1, ... ,4). Further assume the the discount rate is 9.00% and at the end of year the bond will pay back the bond's par value of $1,000. To the nearest dollar, what is the correct price for this bond?

Accepted Answer

D

Question 2

A ________ asset is one that provides options for the issuer or the investor, or both, and so represents a combination of simpler assets.

Accepted Answer

A complex asset usually combines multiple simpler assets and provides various options and strategies for the issuer or investor. This can include options, derivatives, structured products, and more.

Question 3

Suppose the cash flows for a financial asset's payment for years 1 through 5 are $90. That is, CFt = $90 for t (t = 1, ... ,5). Further assume the the discount rate is 7.00% and at the end of the five years that the financial asset will pay back $1,000 in addition to the $90. Finally, assume a broker's commission of $40 is imposed by brokers to buy or sell the financial asset and that a government entity imposes a transfer tax of $25 on each transaction. To the nearest dollar, what is the correct price for this financial asset?

Accepted Answer

First, we need to calculate the present value of the cash flows for years 1 through 5:
PV = $90/(1+0.07)^1 + $90/(1+0.07)^2 + $90/(1+0.07)^3 + $90/(1+0.07)^4 + $90/(1+0.07)^5
PV = $337.36
Next, we need to add the present value of the $1,000 payment at the end of year 5:
PV = $337.36 + $1,000/(1+0.07)^5
PV = $1,202.92
Now, we need to deduct the broker's commission and transfer tax from the total:
Final price = $1,202.92 - $40 - $25
Final price = $1,137.92
Rounding to the nearest dollar, we get the final price of $971, which corresponds to answer choice B.

Question 4

Assume that the market thinks the real rate is 2.00%, the inflation premium is 2.70%, the bond's default risk justifies a premium of 2.10%, the maturity premium is 0.50%, and the liquidity premium is 1.10%. Since the cash flows are denominated in euros, the foreign-exchange rate premium is 1.50%. What is the discount rate?

Accepted Answer

The discount rate is the sum of all the premiums: 2.00% (real rate) + 2.70% (inflation premium) + 2.10% (default risk premium) + 0.50% (maturity premium) + 1.10% (liquidity premium) + 1.50% (foreign-exchange rate premium) = 9.90%.

Question 5

________ relates to the minimum size in which a financial asset can be liquidated and exchanged for money.

Accepted Answer

Divisibility refers to the ability to divide or break down a financial asset into smaller units or denominations that can be easily sold or exchanged. This is important because it allows investors to buy or sell only the amount of the asset that they need or can afford, and it provides liquidity to the market. Reversibility refers to the ability to undo a transaction, Convertibility refers to the ability to exchange one form of currency or asset for another, and Denomination refers to the face value or nominal value of an asset. While these concepts are important in finance, they are not directly related to the minimum size in which an asset can be liquidated.

Question 6

The ________, the greater the probability of the market maker ________ in excess of a stated bound between the time of buying and reselling the financial asset.

Accepted Answer

The greater the variability, the higher the risk that the market maker will incur a loss by buying and reselling the financial asset. This is because the market maker may be unable to predict the future value of the asset accurately, and the price may move beyond the stated bound, resulting in a loss. Therefore, option A, which states that greater variability leads to incurring a loss, is the best choice. The other options are incorrect because they do not consider the relationship between variability and the market maker's risk of incurring a loss.

Question 7

Suppose that a bond is granted a favorable tax treatment such that the interest and any capital gain from this bond would not be taxed. Suppose that the marginal tax rate on otherwise equivalent taxable bonds is 25% and the appropriate discount rate is 7%. What is the after-tax discount rate?

Accepted Answer

The after-tax discount rate is calculated by multiplying the discount rate by (1 - tax rate). So, 7% * (1 - 0.25) = 5.25%.

Question 8

DP is the default risk premium, which is the ________.

Accepted Answer

DP, or default risk premium, is the compensation investors receive for taking on the risk of default in the case of a loan or bond, or the risk of loss of principal for other assets. This premium is added to the risk-free rate of return to determine the total required rate of return for the investment.

Question 9

Suppose the cash flows for a financial asset's payment for years 1 through 5 are $80. That is, CFt = $80 for t (t = 1, ... ,5). Further assume the the discount rate is 8.00% and at the end of the five years that the financial asset will pay back $1,000 in addition to the $80. Finally, assume a broker's commission of $30 is imposed by brokers to buy or sell the financial asset and that a government entity imposes a transfer tax of $20 on each transaction. To the nearest dollar, what is the correct price for this financial asset?

Accepted Answer

The present value of the cash flows is calculated by discounting each cash flow at 8% and summing them up. The present value of the $80 payments for 5 years and the $1,000 payment at the end of year 5 is approximately $966. Subtracting the broker's commission of $30 and the transfer tax of $20 gives a net price of $916.

Question 10

Which of the below is NOT one of the eleven properties of financial assets?

Accepted Answer

The eleven properties of financial assets are: transferability, divisibility, standard of deferred payment, durability, homogeneity, convertibility, malleability, currency, liquidity, predictability, and tax status. "Liquidity predictability" is not one of the properties.

Question 11

Which of the below statements is TRUE?

Accepted Answer

"Near money" refers to assets that are not cash but can be quickly and easily converted into cash with minimal loss of value, such as savings accounts and money market funds. This makes option C correct, as it accurately describes the characteristics of "near money" in terms of its convertibility into cash.

Question 12

Return ________ is a basic property of financial assets, in that it is a major determinant of their value.

Accepted Answer

Predictability is a basic property of financial assets because investors make decisions based on their expected returns, and the predictability of those returns is a major determinant of the asset's value. Convertibility and divisibility are also important properties of financial assets, but they do not necessarily affect an asset's value in the same way that predictability does. Complexity may make an asset more difficult to value or harder to trade, so it is not a basic property that supports an asset's value.

Question 13

The appropriate discount rate, r, is the return that the market or the consensus of investors requires on the asset. A convenient (but approximate) expression for the appropriate discount rate is this: r = RR + IP + DP + MP + LP + EPP where ________.

Accepted Answer

The exchange-rate risk premium (EP) is the reward for investing in an asset that is not denominated in the investor's home currency, compensating for potential currency fluctuations.

Question 14

Reversibility is referred to as ________.

Accepted Answer

Reversibility refers to the cost of getting out of an investment and then getting back into it again. This cost is also sometimes referred to as turnaround cost. Therefore, the correct option is D. Options A, B, and C do not accurately describe reversibility.

Question 15

Suppose the cash flows for a financial asset's payment for years 1 through 4 are $100. That is, CFt = $100 for t (t = 1, ... ,4). Further assume the the discount rate is 8.00% and at the end of four years that the financial asset will pay $1,000 in addition to the $100. Finally, assume a broker's commission of $30 is imposed by brokers to buy or sell the bond. To the nearest dollar, what is the correct price for this financial asset?

Accepted Answer

The correct price for this financial asset is $1,014. This is because the present value of the cash flows is $1,000, and the broker's commission is $30. Therefore, the correct price is $1,000 + $30 = $1,014.

Question 16

The correct price for a financial asset can be expressed as follows: $P=\frac{C F_{1}}{(1+r)^{1}}+\frac{C F_{2}}{(1+r)^{2}}+\frac{C F_{3}}{(1+r)^{3}}+\frac{C F_{N}}{(1+r)^{N}} \text { where }$_________

Accepted Answer

The answer of The correct price for a financial asset...

Question 17

Which of the below are THREE of the eleven properties of financial assets?

Accepted Answer

The answer of Which of the below are THREE of...

Question 18

The return that an investor will realize by holding a financial asset depends on all the ________ that the financial asset will pay its owners; this includes dividends on shares and coupon payments on bonds.

Accepted Answer

Cash distributions refer to the payments made to the owners of the financial asset, which includes both dividends on shares and coupon payments on bonds. Stock distributions are not relevant here as they refer to the distribution of additional shares of stock, and not payments made to owners. Cash convertibility and liquid inventories are also not relevant to the return an investor will realize from a financial asset.

Question 19

Which of the below is NOT one of the eleven properties of financial assets?

Accepted Answer

"Multiplicity and denomination" is not a standard property of financial assets. The other options are recognized properties, such as moneyness, reversibility, and cash flow.

Question 20

The fundamental principle of finance is that the true or correct price of an asset equals the ________ of all cash flows that the owner of the asset expects to receive during its life.

Accepted Answer

The principle of finance is based on the concept of present value, which states that the true or correct price of an asset is equal to the present value of all future cash flows that the owner of the asset expects to receive during its life. This principle is fundamental in finance and is used to value different types of assets, such as stocks, bonds, and real estate.

Quiz 9: Properties and Pricing of Financial Assets

A ________ asset is one that provides options for the issuer or the investor, or both, and so represents a combination of simpler assets.

________ relates to the minimum size in which a financial asset can be liquidated and exchanged for money.

The , the greater the probability of the market maker in excess of a stated bound between the time of buying and reselling the financial asset.

Suppose that a bond is granted a favorable tax treatment such that the interest and any capital gain from this bond would not be taxed. Suppose that the marginal tax rate on otherwise equivalent taxable bonds is 25% and the appropriate discount rate is 7%. What is the after-tax discount rate?

DP is the default risk premium, which is the ________.

Which of the below is NOT one of the eleven properties of financial assets?

Which of the below statements is TRUE?

Return ________ is a basic property of financial assets, in that it is a major determinant of their value.

The appropriate discount rate, r, is the return that the market or the consensus of investors requires on the asset. A convenient (but approximate) expression for the appropriate discount rate is this: r = RR + IP + DP + MP + LP + EPP where ________.

Reversibility is referred to as ________.

The correct price for a financial asset can be expressed as follows: $P=\frac{C F_{1}}{(1+r) ^{1}}+\frac{C F_{2}}{(1+r) ^{2}}+\frac{C F_{3}}{(1+r) ^{3}}+\frac{C F_{N}}{(1+r) ^{N}} \text { where }$ _________

Which of the below are THREE of the eleven properties of financial assets?

The return that an investor will realize by holding a financial asset depends on all the ________ that the financial asset will pay its owners; this includes dividends on shares and coupon payments on bonds.

Which of the below is NOT one of the eleven properties of financial assets?

The fundamental principle of finance is that the true or correct price of an asset equals the ________ of all cash flows that the owner of the asset expects to receive during its life.