FIN 300 Midterm 2 Conceptual Questions

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. $1,000.00 $1,062.81 $1,081.82 $1,100.03

$1,062.81

A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately __________. $1,035 $1,036 $1,094 $1,124

$1,094

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) $13.21 $12.57 $15.44 $16.32

$12.57

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today? Multiple Choice $25.00 $16.87 $19.24 $20.99

$19.24

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach? $1 billion $2 billion $3 billion $4 billion

$2 billion Total value = 300/.10 = $3 billion Equity value = $3 billion - 1 billion = $2 billion

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock? $17.78 $20.00 $40.00 None of these options are correct.

$20.00

A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO? $23.57 $15.00 $19.78 $21.34

$23.57

Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________. Multiple Choice $16.67 $25.00 $37.50 $40.83

$25.00

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return. Multiple Choice $31.25 $32.37 $38.47 $41.32

$32.37

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. $458.11 $641.11 $789.11 $1,100.11

$458.11

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%? $679.81 million $715.54 million $769.23 million $803.03 million

$769.23 million

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at __________. $97.22 $104.49 $364.08 $732.14

$97.22

Where y = yield to maturity, the duration of a perpetuity would be __________. y y/(1 + y) 1/y (1 + y)/y

(1 + y)/y

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year yields have risen to 7%. Your 1-year holding-period return was __________. 0.61% −1.28% 1.28% 3.25%

0.61%

If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? You will have no interest rate risk on this bond. In the absence of default, you can be sure you will earn the promised yield rate. The duration of your bond is less than the time to your investment horizon. 1 only 1 and 2 only 2 and 3 only 1, 2, and 3

1 and 2 only

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: The portfolio must be rebalanced every time interest rates change. The portfolio must be rebalanced over time even if interest rates don't change. Convexity implies duration-based immunization strategies don't work. 1 only 1 and 2 only 2 only 1, 2, and 3

1 and 2 only

Which of the following are examples of cyclical industries? Washing Machines Computer chip manufacturers Kellogg's Frosted Flakes Pfizer 1 and 2 only 1, 2, and 3 only 2, 3, and 4 only 1, 2, 3, and 4

1 and 2 only

Convexity implies that duration predictions: Underestimate the percentage increase in bond price when the yield falls. Underestimate the percentage decrease in bond price when the yield rises. Overestimate the percentage increase in bond price when the yield falls. Overestimate the percentage decrease in bond price when the yield rises. Multiple Choice 1 and 3 only 2 and 4 only 1 and 4 only 2 and 3 only

1 and 4 only

Advantages of cash flow matching and dedicated strategies include: Once the cash flows are matched, there is no need for rebalancing. Cash flow matching typically earns a higher rate of return than active bond portfolio management. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. 1 only 2 only 1 and 3 only 1, 2, and 3

1 only

The duration of a bond normally increases with an increase in: Term to maturity Yield to maturity Coupon rate 1 only 1 and 2 only 2 and 3 only 1, 2, and 3

1 only

The yield to maturity on a bond is: above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium. the discount rate that will set the present value of the payments equal to the bond price. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity. 1 only 2 only 1 and 2 only 1, 2, and 3

1, 2, and 3

Which of the following affects a firm's sensitivity of its earnings to the business cycle? Financial leverage Operating leverage Type of product 2 only 1 and 2 only 1 and 3 only 1, 2, and 3

1, 2, and 3

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: Interest rates increase. Interest rates stay the same. Interest rates fall. 1 only 2 only 1 and 2 only 1, 2, and 3

1, 2, and 3

Which of the following are barriers to entry? Large economies of scale required to be profitable Established brand loyalty Patent protection for the firm's product Rapid industry growth 1 and 2 only 1, 2, and 3 only 2, 3, and 4 only 3 and 4 only

1, 2, and 3 only

An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a __________ in the bond's price. 1.15% decrease 1.20% increase 1.53% increase 2.43% decrease

1.20% increase

If the nominal interest rate is 5% and the inflation rate is 3%, what is the real interest rate?

1.94%

A 1% decline in yield will have the least effect on the price of a bond with a __________. 10-year maturity, selling at 80 10-year maturity, selling at 100 20-year maturity, selling at 80 20-year maturity, selling at 100

10-year maturity, selling at 100

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%. 7.01 9.00 9.39 12.11

12.11

A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond? Multiple Choice 6.7 years 8.0 years 10.0 years 13.0 years

13.0 years

A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? Multiple Choice 2 years 2.15 years 2.29 years 2.53 years

2.29 years

The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be __________. 2.91% 3.85% 1.45% 2.12%

2.91%

t a 4% yield, the duration of a perpetuity that pays $100 once a year forever is __________. Multiple Choice 3.85 years 4.00 years 26.00 years 100.50 years

26.00 years

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: 1. 8% coupon, noncallable 20-year maturity par bond 2. 9% coupon, currently callable 20-year maturity premium bond 3. Zero-coupon 30-year maturity bond 1, 2, 3 2, 3, 1 3, 1, 2 3, 2, 1

3, 1, 2

A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is __________. 4.32 4.00 3.25 3.75

4.00

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? 4.30% 4.50% 5.20% Unknowable

4.30%

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is __________. 4.81% 6.10% 7.76% 10.45%

4.81%

The duration of a 5-year zero-coupon bond is __________ years. 4.5 5.0 5.5 3.5

5.0

The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be __________. −6.00% 4.57% 5.77% 14.40%

5.77%

A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? Multiple Choice 52.38% 48.38% 33.58% 25.48%

52.38%

o create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest __________ of the portfolio value in the zero-coupon bond. 50.00% 54.95% 60.25% 75.05%

54.95%

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is __________. 6.00% 6.58% 7.25% 8.00%

6.00%

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The Macaulay's duration of this bond is __________ years. 7.46 8.08 9.02 10.11

8.08

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? 6.72% 9.17% 4.49% 8.98%

8.98%

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is __________. 7.24% 8.82% 9.12% 9.62%

9.62%

All other things equal (YTM = 10%), which of the following has the shortest duration? A 30-year bond with a 10% coupon A 20-year bond with a 9% coupon A 20-year bond with a 7% coupon A 10-year bond with a 9% coupon

A 10-year bond with a 9% coupon

All other things equal, which of the following has the longest duration? Multiple Choice A 20-year bond with a 10% coupon yielding 10% A 20-year bond with a 10% coupon yielding 11% A 20-year zero-coupon bond yielding 10% A 21-year bond with a 10% coupon yielding 10%

A 20-year zero-coupon bond yielding 10%

All other things equal (YTM = 10%), which of the following has the longest duration? A 30-year bond with a 10% coupon A 20-year bond with a 9% coupon A 20-year bond with a 7% coupon A 10-year zero-coupon bond

A 30-year bond with a 10% coupon

Which one of the following firms would be described as having below-average sensitivity to the state of the economy? A stalwart firm. A cyclical firm. An asset play firm. A defensive firm.

A defensive firm.

Which of the following set of conditions will result in a bond with the greatest price volatility? Multiple Choice A high coupon and a short maturity A high coupon and a long maturity A low coupon and a short maturity A low coupon and a long maturity

A low coupon and a long maturity

Duration measures: the effective maturity of a bond. the weighted average of the time until each payment is received, with weights proportional to the present value of the payment. the average maturity of the bond's promised cash flows. All of these options are correct.

All of these options are correct.

Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends. All three should be willing to pay the same amount for the stock regardless of their holding period.

All three should be willing to pay the same amount for the stock regardless of their holding period.

What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? Cash flow matching Index tracking Yield pickup swaps Substitution swap

Cash flow matching

In an era of particularly low interest rates, which of the following bonds is most likely to be called? Zero-coupon bonds Coupon bonds selling at a discount Coupon bonds selling at a premium Floating-rate bonds

Coupon bonds selling at a premium

In an era of particularly low interest rates, which of the following bonds is most likely to be called? Zero-coupon bonds Coupon bonds selling at a discount Coupon bonds selling at a premium Floating-rate bonds

Coupon bonds selling at a premium

Consider two firms producing smartphones. One uses a highly automated robotics process, while the other uses human workers on an assembly line and pays overtime when there is heavy production demand. a. Which firm will have higher profits in a recession? Firm using human workers Firm using robotics b. Which firm will have higher profits in a boom? Firm using human workers Firm using robotics c. Which firm's stock will have a higher beta? Firm using human workers Firm using robotics

Firm using human workers Firm using robotics Firm using robotics

Which one of the following stocks represents industries with below-average sensitivity to the state of the economy? Financials Technology Food and beverage Cyclicals

Food and beverage

Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? Technical analysis Fundamental analysis Both technical analysis and fundamental analysis Indexing

Fundamental analysis

The market value of all final goods and services produced during a given period is called __________. GDP industrial production capacity utilization factory orders

GDP

Which type of risk is most significant for nearly all bonds? Maturity risk Default risk Interest rate risk Reinvestment rate risk

Interest rate risk

Which one of the following statements is correct? Invoice price = flat price − accrued interest Invoice price = flat price + accrued interest Flat price = invoice price + accrued interest − settlement price Invoice price = settlement price − accrued interest

Invoice price = flat price + accrued interest

__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders. mc Book value per share Liquidation value per share Market value per share Tobin's q

Liquidation value per share

Which one of the following is a common term for the market consensus value of the required return on a stock? Dividend payout ratio Intrinsic value Market capitalization rate Plowback ratio

Market capitalization rate

Which one of the following statements about market and book value is correct? All firms sell at a market-to-book ratio above 1. All firms sell at a market-to-book ratio greater than or equal to 1. All firms sell at a market-to-book ratio below 1. Most firms have a market-to-book ratio above 1, but not all.

Most firms have a market-to-book ratio above 1, but not all.

The duration is independent of the coupon rate only for which one of the following? Discount bonds Premium bonds Perpetuities Short-term bonds

Perpetuities

Which of the following statements is false? Bond prices and yields are inversely related. An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. Interest rate risk is inversely related to the bond's coupon rate.

Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds.

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? Switch from low-duration to high-duration bonds. Switch from high-duration to low-duration bonds. Switch from high-grade to low-grade bonds. Switch from low-coupon to high-coupon bonds.

Switch from high-duration to low-duration bonds.

Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? The nominal exchange rate The nominal interest rate The real exchange rate The real interest rate

The real interest rate

__________ in interest rates are associated with stock market declines. Anticipated increases Unanticipated increases Anticipated decreases Unanticipated decreases

Unanticipated increases

Because of convexity, when interest rates change, the actual bond price will __________ the bond price predicted by duration. always be higher than sometimes be higher than always be lower than sometimes be lower than

always be higher than

An example of a highly cyclical industry is the __________. automobile industry tobacco industry pharmaceutical industry utility industry

automobile industry

If an investment returns a higher percentage of your money back sooner, it will __________. be less price-volatile have a higher credit rating be less liquid have a higher modified duration

be less price-volatile

If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. below-average average above-average Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

below-average

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called __________. book value market value liquidation value Tobin's q

book value

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, __________. both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will decrease in value but bond B will decrease more than bond A

both bonds will decrease in value but bond B will decrease more than bond A

Everything else equal, if you expect a larger interest rate increase than other market participants, you should __________. buy long-term bonds buy short-term bonds buy common stocks buy preferred stocks

buy short-term bonds

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. callable coupon puttable Treasury

callable

If you are holding a premium bond, you must expect a __________ each year until maturity. If you are holding a discount bond, you must expect a __________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) capital gain; capital loss capital gain; capital gain capital loss; capital gain capital loss; capital loss

capital loss; capital gain

Pharmaceuticals, food, and other necessities would be relatively good performers during the __________ stage of the business cycle. peak contraction trough expansion

contraction

Which of the following rates represents a bond's annual interest payment per dollar of par value? holding period return coupon rate IRR YTM

coupon rate

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. nominal yield current yield yield to maturity yield to call

current yield

If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to __________. increase; increase increase; decrease decrease; increase decrease; decrease

decrease; decrease

When interest rates increase, the duration of a 20-year bond selling at a premium __________. increases decreases remains the same increases at first and then declines

decreases

In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the __________. average bond maturity in the portfolio duration of the portfolio difference between the shortest duration and longest duration of the individual bonds in the portfolio average of the shortest duration and longest duration of the bonds in the portfolio

duration of the portfolio

A firm cuts its dividend payout ratio. As a result, you know that the firm's __________. return on assets will increase earnings retention ratio will increase earnings growth rate will fall stock price will fall

earnings retention ratio will increase

The term "residual claimant" refers to: bond holders. option holders. equity/shareholders. suppliers.

equity/shareholders.

Stock prices are __________ measures of firm value. backward-looking forward-looking coincident lagging

forward-looking

The analysis of the determinants of firm value is called __________. fundamental analysis technical analysis momentum analysis indexing

fundamental analysis

An underpriced stock provides an expected return that is __________ the required return based on the capital asset pricing model (CAPM). less than equal to greater than greater than or equal to

greater than

You would expect the beta of cyclical industries to be __________ and the beta of defensive industries to be __________. greater than 1; less than 1 less than 1; less than 1 less than 1; greater than 1 greater than 1; greater than 1

greater than 1; less than 1

The value of Internet companies is based primarily on __________. current profits Tobin's q growth opportunities replacement cost

growth opportunities

The constant-growth dividend discount model (DDM) can be used only when the ___________. growth rate is less than or equal to the required return growth rate is greater than or equal to the required return growth rate is less than the required return growth rate is greater than the required return

growth rate is less than the required return

If you believe the economy is about to go into a recession, you might change your asset allocation by selling __________ and buying __________. growth stocks; long-term bonds long-term bonds; growth stocks defensive stocks; growth stocks defensive stocks; long-term bonds

growth stocks; long-term bonds

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be __________. higher lower the same indeterminate

higher

Firms with higher expected growth rates tend to have P/E ratios that are __________ the P/E ratios of firms with lower expected growth rates. higher than equal to lower than There is not necessarily any linkage between risk and P/E ratios.

higher than

A bond's price volatility __________ at __________ rate as maturity increases. increases; an increasing increases; a decreasing decreases; an increasing decreases; a decreasing

increases; a decreasing

The fed funds rate is the __________. interest rate that banks charge their best corporate customers interest rate banks charge each other for overnight loans of deposits on reserve at the Fed interest rate the Fed charges commercial banks on short-term loans interest rate that the U.S. Treasury pays on its bills

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if __________. Multiple Choice interest rates increase interest rates stay the same interest rates fall The answer cannot be determined from the information given.

interest rates fall

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if __________. Multiple Choice interest rates increase interest rates stay the same interest rates fall The answer cannot be determined from the information given.

interest rates increase

A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if __________. Multiple Choice interest rates fall credit spreads fall interest rates rise the price of all fixed-income securities rises

interest rates rise

The duration of a perpetuity varies __________ with interest rates. directly inversely convexly randomly

inversely

You can be sure that a bond will sell at a premium to par when __________. its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value

its coupon rate is greater than its yield to maturity

Everything else equal, which variable is negatively related to the intrinsic value of a company? Multiple Choice D1 D0 g k

k

Everything else equal, the __________ maturity of a bond and the __________ coupon, the greater the sensitivity of the bond's price to interest rate changes. longer; higher longer; lower shorter; higher shorter; lower

longer; lower

All else equal, bond price volatility is greater for __________. higher coupon rates lower coupon rates shorter maturity lower default risk

lower coupon rates

All other things equal, a bond's duration is __________. Multiple Choice higher when the coupon rate is higher lower when the coupon rate is higher the same when the coupon rate is higher indeterminable when the coupon rate is high

lower when the coupon rate is higher

All other things equal, a bond's duration is __________. higher when the yield to maturity is higher lower when the yield to maturity is higher the same at all yield rates indeterminable when the yield to maturity is high

lower when the yield to maturity is higher

Banks and other financial institutions can best manage interest rate risk by __________. maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities

matching the durations of their assets and liabilities

Bond prices are __________ sensitive to changes in yield when the bond is selling at a __________ initial yield to maturity. Multiple Choice more; lower more; higher less; lower equally; higher or lower

more; lower

Items that are __________ and product purchases for which __________ is not important tend to be less cyclical in nature. necessities; income luxuries; leverage discretionary goods; time of purchase produced with high fixed costs; entertainment

necessities; income

A big increase in government spending is an example of a __________. positive demand shock positive supply shock negative demand shock negative supply shock

positive demand shock

Duration is a concept that is useful in assessing a bond's _________. Multiple Choice credit risk liquidity risk price volatility convexity risk

price volatility

Stock prices tend to __________ when corporate earnings __________. rise; rise rise; fall fall; rise None of these options are correct.

rise; rise

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed __________. sector rotation contraction/expansion analysis life-cycle analysis business-cycle shifting

sector rotation

In regard to bonds, convexity relates to the __________. shape of the bond price curve with respect to interest rates shape of the yield curve with respect to maturity slope of the yield curve with respect to liquidity premiums size of the bid-ask spread

shape of the bond price curve with respect to interest rates

An increase in a bond's yield to maturity results in a price decline that is __________ the price increase resulting from a decrease in yield of equal magnitude. greater than equivalent to smaller than The answer cannot be determined.

smaller than

The invoice price of a bond is the __________. stated or flat price in a quote sheet plus accrued interest stated or flat price in a quote sheet minus accrued interest bid price average of the bid and ask price

stated or flat price in a quote sheet plus accrued interest

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to __________. the dollar amount of the investment received in year t the percentage of the future value of the investment received in year t the present value of the dollar amount of the investment received in year t the percentage of the total present value of the investment received in year t

the percentage of the total present value of the investment received in year t

Convexity of a bond is __________. -the same as horizon analysis -the rate of change of the slope of the price-yield curve divided by the bond price -a measure of bond duration -None of these options are correct.

the rate of change of the slope of the price-yield curve divided by the bond price

Given its time to maturity, the duration of a zero-coupon bond is __________. Multiple Choice higher when the discount rate is higher higher when the discount rate is lower lowest when the discount rate is equal to the risk-free rate the same regardless of the discount rate

the same regardless of the discount rate

If a stock is correctly priced, then you know that __________. the dividend payout ratio is optimal the stock's required return is equal to the growth rate in earnings and dividends the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return the present value of growth opportunities is equal to the value of assets in place

the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on __________. the terminal value used whether one uses FCFF or FCFE the time period used to estimate the cash flows whether the firm is currently paying dividends

the terminal value used

GDP refers to __________. the amount of personal disposable income in the economy the difference between government spending and government revenues the total manufacturing output in the economy the total production of goods and services in the economy

the total production of goods and services in the economy

The duration of a portfolio of bonds can be calculated as __________. the coupon weighted average of the durations of the individual bonds in the portfolio the yield weighted average of the durations of the individual bonds in the portfolio the value weighted average of the durations of the individual bonds in the portfolio averages of the durations of the longest- and shortest-duration bonds in the portfolio

the value weighted average of the durations of the individual bonds in the portfolio

The duration rule always __________ the value of a bond following a change in its yield. underestimates provides an unbiased estimate of overestimates The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

underestimates

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A __________. Multiple Choice will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B The answer cannot be determined from the information given.

will be higher than the intrinsic value of stock B

You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A __________. Multiple Choice will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B The answer cannot be determined from the information given.

will be higher than the intrinsic value of stock B

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock __________. has a Tobin's q value < 1 will generate a positive alpha has an expected return less than its required return has a beta > 1

will generate a positive alpha

If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________. you have more information than others you are a better analyst than others you have the same information as others you are an equally good analyst as others

you are a better analyst than others

An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a __________ coupon and a __________ term to maturity. low; long high; short high; long zero; long

zero; long

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is __________. +1.4% −1.4% −2.51% +2.51%

−1.4%

Suppose that in 2018 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market index will change by __________. −10% −20% −25% −33%

−33% 240/(.08-.06) = 12000 and 240/(.09-.06) = 8000 (8000-12000)/120000