FN6350 Quiz 2

Question 1

Which of the following statements regarding the Law of One Price is INCORRECT?

 

A) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets.

 

 

B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets.

 

   

C) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

 

 

D) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same.

 

Question 2

Wyatt oil is considering drilling a new self sustaining oil well at a cost of $1,000,000. This well will produce $100,000 worth of oil during the first year, but as oil is removed from the well the amount of oil produced will decline by 2%, per year forever. If the Wyatt oil's appropriate interest rate is 8%, then the NPV of this oil well is closest to:

 

A) $1,000,000

 

   

B) $0

 

 

C) $250,000

 

 

D) -$250,000

 

Question 3

You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to:

 

A) 10%

 

 

B) 8.5%

 

 

C) 8%

 

   

D) 9%

 

Question 4

Which of the following statements is FALSE?

 

A) Interest rates vary with the investment horizon.

 

 

B) When we refer to the "risk-free interest rate," we mean the rate on U.S. Treasuries.

 

 

C) All borrowers, besides the U.S. Treasury, have some risk of default.

 

   

D) When interest on a loan is tax deductible, the effective after-tax interest rate is t × (1 - r).

 

Question 5

Which of the following statements is FALSE?

   

A) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.

 

 

B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk.

 

 

C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment.

 

 

D) The investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted.

 

Question 6

Which of the following statements is FALSE?

 

A) The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year, thereby converting it to an APR.

 

   

B) Bond traders typically quote bond prices rather than bond yields .

 

 

C) Zero-coupon bonds always trade at a discount.

 

 

D) Treasury bills are zero-coupon bonds.

 

Question 7

Which of the following statements is FALSE?

   

A) Bonds with higher coupon rates are more sensitive to interest rate changes.

 

 

B) As interest rates and bond yields fall, bond prices will rise.

 

 

C) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.

 

 

D) Bond prices converge to the bond's face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.

 

Question 8

Which of the following statements is FALSE?

 

A) For most investment opportunities, expenses occur initially and cash is received later.

 

 

B) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.

 

 

C) Fifty percent of firms surveyed reported using the payback rule for making decisions.

 

   

D) The payback rule is reliable because it considers the time value of money and depends on the cost of capital.

 

Question 9

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is:

A) profitability index.

 

  B) NPV.

 

C) IRR.

 

D) incremental IRR.

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Status NEW Posted 01 Aug 2017 04:08 PM My Price 10.00

FN6-----------350----------- Qu-----------iz -----------2-----------

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