Unit 20
XYZ Corporation common stock has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ stock will be
15 initial: 45/3 = 15 new: 15/1 = 15
XYZ Corporation has a beta of 1, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 18.8%. Based on this information ABC had alpha of
2%
Rank the following bonds in order of shortest to longest duration. ABC 8s of 2050 DEF 9s of 2051 GHI 5s of 2049 JKL zeros of 2050
2, 1, 3, 4
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond's internal rate of return is
6%
A portfolio manager who is successful at market timing will A) increase the beta of the portfolio in advance of a rising market. B) have a portfolio beta less than the beta required by the client. C) increase the beta of the portfolio in advance of a declining market. D) decrease the beta of the portfolio in advance of a rising market.
A
An investor's portfolio consists of a single stock. If a stock with a correlation of +.95 was added to the portfolio and the stock market turned bearish, what would be the likely effect of having added this additional security? A) Almost no noticeable impact. B) The portfolio's value would remain the same. C) Not enough information to tell. D) The portfolio's value would increase.
A
Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) Treasury bond issued at par carrying a 7% coupon B) AA corporate bond carrying a 7% coupon C) Treasury bond issued at par carrying a 6% coupon D) AAA corporate bond carrying a 6% coupon
A
Some analysts use the discounted cash flow to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the A) present value of the par value repaid at maturity plus the present value of the coupon payments. B) future value of the par value repaid at maturity plus the future value of the coupon payments. C) present value of the par value repaid at maturity plus the future value of the coupon payments. D) future value of the par value repaid at maturity plus the present value of the coupon payments.
A
Which of the following statements is most accurate regarding the net present value (NPV) and internal rate of return (IRR) on a bond? A) NPV assumes the cash flows can be reinvested at market interest rates. B) IRR assumes the cash flows are reinvested annually. C) IRR assumes the cash flows are reinvested at market interest rates. D) NPV assumes that cash flows can be reinvested at the bond's IRR.
A
Which of the following is a stock valuation ratio? A) Dividend payout ratio B) Price-earnings C) Revenues to assets D) Operating profits to net sales
B
The market price of which of the following bonds would have the greatest percentage increase if interest rates fell? A) 15-year maturity, selling at a premium B) 30-year maturity, selling at a discount C) 15-year maturity, selling at a discount D) 30-year maturity, selling at a premium
B -- discounted bonds have lower coupons, respond more intensely to int rate changes
Which of the following factors has an inverse relationship to a bond's duration? A) Time to maturity B) Par value C) Yield to maturity D) Rating
C
An investor would be unlikely to use internal rate of return to analyze the potential return for which of the following investments? A) Direct participation programs (DPPs) B) Municipal bonds C) Treasury notes D) Common stock
D
One popular method of determining the value of certain securities is discounted cash flow. Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value? A) Bay Area Rapid Transit Authority 4% revenue bond maturing in 15 years B) XYZ Corporation mortgage bond maturing in 10 years with a coupon of 4.5% C) U.S. Treasury bond maturing in 20 years with a 4% coupon D) ABC Corporation debenture maturing in 25 years with a 5% coupon
D
When it comes to computing market returns, it is true to state that A) the median is always higher than the geometric mean B) the mode is always higher than the mean C) the median is always lower than the average D) the geometric mean could never be greater than the arithmetic mean
D
order of things when selling at discount
YTC > YTM > CY > coupon
An analyst wishes to assess the value of a fixed income security by taking the income payments scheduled to be received over a given future period and adjusting that for the time value of money. This analytical tool is known as
discounted cash flow
A measure of a bond's volatility with respect to a change in interest rates
duration
A client owns an investment-grade bond that has a coupon of 7% and is priced to yield 5.4%. If similarly rated bonds are being issued today with coupons of 5%, it would be expected that the client's bond
has a positive net present value (5.4 > 5)
If the required rate of return is less than anticipated in a present value calculation, the effect would be that the
present value would be higher
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is
selling at a premium
The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to
shorten the average duration of the portfolio
Which of the following measures the variability of an asset's returns over time?
standard deviation
The difference between present value and net present value represents
the initial cash outlay
One measure of a corporation's liquidation value is its book value per share. When performing this computation, the value of which of the following would normally be subtracted from the corporation's net worth? Cash Wages payable Patents Preferred stock
3 and 4
A bond investor's portfolio consists of the following 3 bonds: ABC First Mortgage bond, current market value of $4 million with a duration of 5 years. DEF Debenture, current market value of $5 million with a duration of 8 years. U.S. Treasury bond, current market value of $1 million with a duration of 10 years. What is the average duration of the portfolio?
7 years (.4 * 5) + (.5 * 8) + (.1 * 10)
order of things when selling at premium
coupon > CY > YTM > YTC
Two securities with which of the following correlation coefficients could be combined to create a theoretically risk-free portfolio?
-1.0
A securities analyst reviewing a corporation's financial statements notes that the enterprise has total current assets of $10 million, inventory of $4 million, cash on hand of $2 million, total current liabilities of $8 million, and net income of $15 million. The company's acid-test ratio is closest to
0.75 to 1.00 (10-4)/8
The following numbers (in %) represent the returns from an investment fund over the past seven years: 2016: 13%, 2017: 11%, 2018: 2%, 2019: 6%, 2020: 5%, 2021: 8%, 2022: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of
7.5%
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) GHI 7s of 2047 B) JKL 4s of 2025 C) DEF 6s of 2046 D) ABC 5s of 2045
D
All of the following statements regarding an investment's internal rate of return (IRR) are true except A) IRR is most often used with growth stocks B) IRR expresses the rate of interest that matches the initial investment with the present value of future cash flows C) investments are acceptable when their internal rates of return exceed the investor's required rate of return D) IRR is the one rate of return that results in an investment having a net present value (NPV) of 0
A -- review other options
One measure of a corporation's liquidation value is its book value per share. When performing this computation, which of the following must be taken into consideration? Goodwill Long-term debt Retained earnings Par value of the preferred stock
all 4
