3403 Exam Concepts
Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? An 8-year bond with a 9% coupon. A 1-year bond with a 15% coupon. A 3-year bond with a 10% coupon. A 10-year zero-coupon bond. A 10-year bond with a 10% coupon.
10yr zero coupon bond
A bond trader observes the following information: - The Treasury yield curve is downward sloping. - Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. - Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information, which of the following statements is most CORRECT? A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond. The corporate yield curve must be flat. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.
A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
Which of the following statements is CORRECT? If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity. All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities. All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.
All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.
Which of the following would be most likely to lead to a higher level of interest rates in the economy? Households start saving a larger percentage of their income. Corporations step up their expansion plans and thus increase their demand for capital. The level of inflation begins to decline. The economy moves from a boom to a recession. The Federal Reserve decides to try to stimulate the economy.
Corps step up their expansion plans & increase demand for capital
Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT? If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price. If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price.
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? If the pure expectations theory holds, the Treasury yield curve must be downward sloping. If the pure expectations theory holds, the corporate yield curve must be downward sloping. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. If inflation is expected to decline, there can be no maturity risk premium.
If the pure expectations theory holds, the treasury yield curve must be downward sloping
A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? The bond's current yield is less than 8%. If the yield to maturity remains at 8%, then the bond's price will decline over the next year. The bond's coupon rate is less than 8%.
If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. Stock A would be a more desirable addition to a portfolio then Stock B. In equilibrium, the expected return on Stock B will be greater than that on Stock A. When held in isolation, Stock A has more risk than Stock B. Stock B would be a more desirable addition to a portfolio than A. In equilibrium, the expected return on Stock A will be greater than that on B.
In equilibrium, the expected return on Stock A will be greater than that on B.
Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
Maturity risk premiums could help explain the yield curve's upward slope
For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. The beta of the portfolio is less than the weighted average of the betas of the individual stocks. The beta of the portfolio is equal to the weighted average of the betas of the individual stocks. The beta of the portfolio is larger than the weighted average of the betas of the individual stocks.
Portfolio beta = weighted avg of betas of the individual stocks
Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return? There is no reason to expect a change in the required rate of return. The required rate of return would decline because the bond would then be less risky to a bondholder. The required rate of return would increase because the bond would then be more risky to a bondholder. It is impossible to say without more information.
The required rate of return would increase because the bond would then be more risky to a bondholder.
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? The yield on a 10-year bond would be less than that on a 1-year bill. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. It is impossible to tell without knowing the coupon rates of the bonds. The yields on the two securities would be equal. It is impossible to tell without knowing the relative risks of the two securities.
Yield on a10yr bond would be LESS than that on a 1yr bill
Which of the following statements is CORRECT? You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.
false
The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio. t/f
false
The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly. t/f
false
The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. t/f
false
Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or corvertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
if the treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds.
Which of the following events would make it more likely that a company would call its outstanding callable bonds? The company's bonds are downgraded. Market interest rates rise sharply. Market interest rates decline sharply. The company's financial situation deteriorates significantly. Inflation increases significantly.
market interest rates decline sharply
A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%. t/f
true
Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away. t/f
true
If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the lower standard deviation. t/f
true
If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future t/f
true
If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future. t/f
true
Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength. t/f
true
Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures. t/f
true
The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation. True False
true
The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant. t/f
true
The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk." t/f
true
