1. The expected return on a corporate bond is less than the investor required return for that bond. Which of the following is the most likely market response to that relationship?
A. The price will rise and the expected return will rise as a result of market trading of this bond.
B. The price will rise and the expected return will fall as a result of market trading of this bond.
C. The price will fall and the expected return will rise as a result of market trading of this bond.
D. The price will fall and the expected return will fall as a result of market trading of this bond.
2. Which of the following statements is most true in regard to the efficient market hypothesis of security pricing?
A. When the market is properly functioning, expected returns, required returns and actual returns are all equal.
B. When new information becomes available to investors, the impact of that information is immediately understood and incorporated into the market price of all securities.
C. Both a and b are true.
D. Neither a nor b are true.
3. Based on the current market price, a bond's yield is less than the average yield on bonds having similar risks. Which of the following statements is most likely given this relationship?
A. The bond's market price will rise and the yield will fall due to market trading of this bond.
B. The bond's market price will fall and the yield will fall due to market trading of this bond.
C. The bond's market price will rise and the yield will rise as a result of market trading of this bond.
D. The bond's market price will fall and the yield will rise as a result of market trading of this bond.
4. Which of the following statements are true regarding the beta measurement for an equity investment?
A. The beta measurement is based on the ratio of covariance between the stock and market and the market variance.
B. The beta measures the relative degree of risk that cannot be eliminated by diversification into a portfolio of investments.
C. The beta measurement can be positive, negative, or zero.
D. All of the above are true.
5. The net present value of a project is positive. Which of the following statements are true?
A. The internal rate of return exceeds the cost of capital.
B. The internal rate of return is equal to the cost of capital.
C. The internal rate of return is less than the cost of capital.
D. It is impossible to make a statement about the internal rate of return unless we have more information.