If the coupon rate equals the required rate of return, the price of the bond =
should be equal to its par value
For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the
greater is the discount on the price
A(n) _____ in the expected level of inflation results in _____ pressure on bond prices.
increase ; downward
The prices of _____ coupon bonds and bonds with __________ maturities are most sensitive to changes in the required rate of return.
low; long
Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.
laddered
With a(n) ______ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to cover liquidity needs.
barbell
If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.
downward pressure; upward pressure
To determine the present value of a bond that pays semiannual interest, which of the following adjustments should NOT be made to compute the price the bond?
The par value should be split in half
A 15-year old bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
The bond's yield to maturity is greater than its coupon rate
A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $28.50 each and matures in 6yrs. What is the coupon rate?
coupon rate = (28.5*2)/1,000 = 5.70%
A 5.5% $1,000 bond matures in 7yrs, pays interest semiannually, and has a YTM of 6.23%. What is the current market price of the bond?
$959.09
The SPO needs to raise $2.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that matures in 20 years. The market yield on similar bonds is 8.8%. Hoe many bonds must the SPO sell
N=20*2
I/Y=8.8/2
FV=1,000
CPT PV= 178.64
# of bonds= 2,200,000/178.64 = 12,315 bonds
The limitation of the dividend discount model are more pronounced when valuing stocks
that retain most of their earnings
When evaluating stock performance, _____ measures variability that is systematically related to market returns; ______ measures total variability of a stock's return
beta: standard deviation
The ______ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility.
Sharpe
If security prices fully reflect all market-related information (such as historical price pattern) but do not full reflect all other public information, security markets are
weak-form efficient
A stock's beta can be measured from the estimate of the _____ using regression analysis
slope coefficient
The market risk premium is:
the return of the market in excess of the risk-free rate
beta: 1.46
expected return on market:13.9
risk free: 4.6
What is expected return on stock?
4.6 + 1.46(13.9-4.6) = 18.18
stock expected return: 18.18
risk free: 4.6
MRP: 9.3
What is the beta?
18.18 = 4.6 + X (9.3)
13.58 = X(9.3)
X = 1.46
dividend: $1.45
increase 2.8% annually
What is one share of stock worth if you require a 14% rate of return?
(1.45 x 1.028^6)/(0.14-0.028) = $15.279
A(n) ______ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specific price and date
financial future contract
If speculators believe interest rates will _______, they would consider ______ a T bill futures contract today.
increase; selling
A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will _____ and the position in the futures contracts will result in a _______
decrease; gain
The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at
the settlement date
Which of the following statements is INCORRECT with respect to cross-hedging?
If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contract