# IFM11 TB Ch29

Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.

Multiple Choice: True/False

(29.1) CompoundingF JAnswer: b EASY

1.Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

a.True

b.False

(29.1) CompoundingF JAnswer: a EASY

2.Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

a.True

b.False

(29.1) PV versus FVC JAnswer: b EASY

3.If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

a.True

b.False

(29.1) PV versus FVC JAnswer: b EASY

4.Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

a.True

b.False

(29.1) Effective annual rateC JAnswer: a EASY

5.If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

a.True

b.False

(29.1) Growing annuityC JAnswer: a EASY

6.A “growing annuity” is a cash flow stream that grows at a constant rate for a specified number of periods.

a.True

b.False

(29.2) Zero coupon bondF G

Answer: b

EASY

7.

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

a.

True

b.

False

(29.2) Discounted cash flowsF G

Answer: a

EASY

8.

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

a.

True

b.

False

(29.2) Bond prices and interest ratesF G

Answer: a

EASY

9.

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

a.

True

b.

False

(29.2) Interest rate riskF G

Answer: b

EASY

10.

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

a.

True

b.

False

(29.2) Interest rate riskF G

Answer: b

EASY

11.

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

a.

True

b.

False

(29.3) Standard deviationF NAnswer: b EASY

12.The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

a.True

b.False

(29.3) Coefficient of variationF NAnswer: a EASY

13.The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

a.True

b.False

(29.3) Portfolio riskF NAnswer: a EASY

14.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.

a.True

b.False

(29.3) Portfolio riskF NAnswer: a EASY

15.Diversification will normally reduce the riskiness of a...

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