NASAA Series 66 — All Questions

A Treasury bond has a duration of 5 years. If interest rates rise by 1 percentage point, its price should change by approximately:

• a.a decline of 1%
• b.a decline of 5%✓
• c.a rise of 5%
• d.a decline of 0.2%

Duration estimates the percentage price change for a 1-point move in rates, and the relationship is inverse, so a 5-year duration implies about a 5% price decline. A 5% rise reverses the direction. A 1% decline uses the rate change as the price change and ignores duration. A 0.2% decline divides the rate move by the duration instead of multiplying.

Holding maturity and yield constant, which change would lengthen a bond's duration?

• a.A shorter remaining time to maturity
• b.A higher market yield to maturity
• c.A lower coupon rate on the bond✓
• d.A higher coupon rate on the bond

A lower coupon pushes a larger share of the bond's cash flow to maturity, which lengthens duration. A higher coupon returns cash sooner and shortens duration. A shorter maturity shortens duration directly. A higher yield discounts distant cash flows more heavily and also shortens duration.

A company reports total debt of $400 million and shareholders' equity of $250 million. What is its debt-to-equity ratio?

• a.0.62
• b.1.6✓
• c.2.6
• d.0.63

Debt-to-equity divides total debt by shareholders' equity: 400 / 250 = 1.6. The 0.63 figure turns the fraction upside down, 0.62 divides debt by total capital (debt plus equity), and 2.6 divides total capital by equity, so neither is the ratio asked for.NASAA Series 66 Content Outline, Topic II

A company generated $180 million in cash flow from operations and spent $65 million on capital expenditures. What is its free cash flow?

• a.$65 million
• b.$180 million
• c.$245 million
• d.$115 million✓

Free cash flow is operating cash flow minus capital expenditures: 180 - 65 = 115. Adding the two instead of subtracting overstates the figure, and reporting either input alone ignores the other.NASAA Series 66 Content Outline, Topic II

An asset has an average annual return of 8% and a standard deviation of 12%. What is its coefficient of variation?

• a.0.96
• b.1.5✓
• c.0.67
• d.4.0

The coefficient of variation is standard deviation divided by expected return: 12 / 8 = 1.5, a measure of risk per unit of return. Flipping the ratio gives 0.67, which is return per unit of risk.NASAA Series 66 Content Outline, Topic II

A project costs $1,000 today and returns $600 at the end of each of the next two years. The required return is 10%. What is its net present value, rounded to the nearest dollar?

• a.$100
• b.$41✓
• c.$200
• d.-$41

Discounting gives 600 / 1.10 + 600 / 1.21, about 545 + 496, or 1,041. Subtracting the 1,000 cost leaves about $41, which is positive, so the project exceeds its required return. Ignoring discounting gives 200.NASAA Series 66 Content Outline, Topic II

Real GDP for a year is $2,000 billion when measured at base-year prices, and nominal GDP is $2,200 billion. What is the GDP deflator?

• a.110✓
• b.90.9
• c.220
• d.10

The GDP deflator is nominal GDP divided by real GDP, times 100: 2,200 / 2,000 x 100 = 110, which indicates prices rose 10 percent from the base year. Inverting the ratio gives 90.9.NASAA Series 66 Content Outline, Topic II

An analyst estimates a stock will return 20% in a strong economy (25% probability), 8% in a normal economy (50%), and -12% in a recession (25%). What is the expected return?

• a.5.3%
• b.6.0%✓
• c.8.0%
• d.10.0%

The expected return weights each outcome by its probability: 0.25 x 20 + 0.50 x 8 + 0.25 x (-12) = 5 + 4 - 3 = 6.0 percent. The middle outcome alone overlooks the asymmetry of the tails, and a simple average of the three outcomes gives 5.3 percent, which ignores the weights.NASAA Series 66 Content Outline, Topic II

A company earns a return on equity of 15% and pays out 40% of its earnings as dividends. Assuming no new equity is issued and the ratios stay constant, what is its sustainable growth rate?

• a.6.0%
• b.9.0%✓
• c.15.0%
• d.25.0%

Sustainable growth equals return on equity times the retention ratio: 15% x (1 - 0.40) = 9.0 percent. Multiplying by the payout ratio gives 6.0 percent, which measures the dividend portion rather than retained growth.NASAA Series 66 Content Outline, Topic II