Final

Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share. Analysts were expecting $.51. What is the amount of the surprise portion of the announcement?

$.45 - $.51 = -$.06

A 5.5 percent coupon bond has a face value of $1,000 and a current yield of 5.64 percent. What is the current market price?

(.055*1,000) ------------------ = 975.18 .0564

What is the expected return on this stock given the following information?

(.40 × 16) + (.60 × -22) = -6.80 percent

A bond pays semiannual interest payments of $42.50. What is the coupon rate if the par value is $1,000?

(42.50*2) ------------- = 8.50% 1,000

A portfolio consists of the following securities. What is the portfolio weight of stock X?

(600 × $17)/[(600 × $17)+(900 × $23)+(400 × $49)] = .202

A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price?

1000 * (1-120) *0.338 = 988.73 ---------- 360

The common stock of Industrial Technologies has an expected return of 12.4 percent. The market return is 9.2 percent and the risk-free return is 3.87 percent. What is the stock's beta?

12.4 = 3.87 + β (9.2 - 3.87); β = 1.60

An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8 percent?

22,500 ---------------- = 14,754.72 (1 + 0.48)^9

The market rate on a bond fell from 8.76 percent to 8.73 percent. This is a decline of how many basis points?

3

What is the current value of a $5,000 face value STRIPS with 6 years to maturity and a yield to maturity of 8.1 percent?

5,000 ------------------------- = 3,105.02 (1 + (.081/2) ^6*2

A $1,000 face value bond matures in 11 years, pays interest semiannually, and has a 6.5 percent coupon. The bond currently sells for $1,025. What is the yield to maturity?

6.18 percent n=22 i/y=3.09 pv=1,025 fv= 32.50 fv=1,000 YTM = 2*I/y = 6.18

The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent. What is the expected return on a risky asset if the beta of that asset is 1.03?

6.8 = e(ra) - 5.3 ------------------ = 12.30% 1.03

A $1,000 semiannual coupon bond matures in 15 years, has a coupon rate of 7.5 percent, and a market price of $982. What is the yield to maturity?

7.70 percent n=30 i/y=3.85 pv=982 pmt=37.50 fv=1,000 YTM (yield to maturity) = 2 *i/y = 7.70

Blue Water Homes has 8 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually. These bonds have a par value of $1,000 and are callable in 2 years at a premium of $75. What is the yield to call if the current price is equal to 103.25 percent of par?

9.66% n=4 i/y=?/2 pv=-1,032.50 pmt=40 fv=1,075 4.83*2=9.66

The Country Inn has bonds outstanding with a par value of $1,000 each and a 6.6 percent coupon. The bonds mature in 7.5 years and pay interest semiannually. What is the current value of each of these bonds if the yield to maturity is 6.8 percent?

988.40 n=15 i/y=3.40 pmt=33 fv=1,000 pv=988.40

Which one of the following stocks has the highest expected risk premium?

A

Method for quoting interest rates on money market instruments

Bank discount basis

Interest rate that serves as a leader or as a leading indicator of future trends

Bellwether rate

The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information?

E(R) = (.35 × 14) + (.65 × 8) = 10.10 Risk premium = 10.10 - 4.15 = 5.95 percent

The stock of Healthy Eating, Inc., has a beta of .88. The risk-free rate is 3.8 percent and the market return is 9.6 percent. What is the expected return on Healthy Eating's stock?

E(R) = 3.80 + .88(9.60 - 3.80) = 8.90 percent

A Treasury bill matures in 68 days and has a bond equivalent yield of 4.05 percent. What is the effective annual rate?

EAR = [1 + (.0405)^(365/68) -1 =4.12% ---------- (365/68)

What is the variance of the expected returns on this stock?

Er=(.30*25)+(.70*12)=15.90 Var=.30(25-15.90)^2 + .70(12-15.90)^2 =35.49

Which one of the following is defined as U.S. dollar-denominated deposits held in a foreign bank?

Eurodollars

term structure of interest rates is a reflection of financial market beliefs regarding future interest rates

Expectations theory

Fundamental interest rate for commercial banking activity

Federal Funds Rate

1) bond prices and bond yields move in opposite directions 2)for a given change in a bond's YTM, longer the term to the maturity the greater the magnitude of the change 3)For a given change in a bond's yield to maturity, the size of the change in the bond's price increases at a diminishing rate as the bond's term to maturity lengthens. 4)For a given change in a bond's yield to maturity, the resulting percentage change in the bond's price is inversely related to the bond's coupon rate. 5.For a given absolute change in a bond's yield to maturity, the magnitude of the price increase caused by a decrease in yield is greater than the price decrease caused by an increase in yield.

Malkiel's theorems

Basic interest rate on short term loans that the largest commercial bank charge to their most creditworthy corporate customers

Prime rate

Pure discount instruments created by "stripping" the coupons and principal payments of US Treasury notes and bonds into separate parts, and then selling them separately

STRIPS

Relationship between time to maturity and interest rates for default-free, pure discount instruments

Term structure of interest rates

Stock X has a beta of .95 and an expected return of 10.8 percent. Stock Y has a beta of 1.2 and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced?

[10.80 - rf]/.95 = [13.1 - rf]/1.2; rf = 2.06%

Which one of the following is the method used to quote interest rates on money market instruments?

bank discount basis

You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is the expected rate of return on this portfolio?

boom=(.65*17)+(.35*12)=15.25 norm=(.65*10)+(.35*7)=8.95 rec=(.65*-21)+(.35*1)=-13.30 =(0.15*15.25)+(0.65*8.95)+(.20*-13.30)=5.45 %

annual coupon amount divided by par value

coupon rate

As the number of individual stocks in a portfolio increases, the portfolio standard deviation:

decreases at a diminishing rate.

Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio?

diversifiable risk

Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a relatively small change in bond yields?

duration

general level of nominal interest rates follow the general level of inflation

fisher hypothesis

A discount bond:

has a face value that exceeds the market value.

Which one of the following terms is another name for systematic risk?

market risk

Which one of the following is expressed as "E(RM) - Rf"?

market risk premium

debt markers are segmented by maturity, with the result that interest rates vary for various maturities are determined separately each segment

market segmentation theory

To immunize your portfolio, you should:

match bond durations to your target dates.

long term interest rates contain a maturity premium necessary to induce lenders into making longer term loans

maturity preference theory

interest rates as they are normally observed for and quoted, with no adjustments for inflation

nominal interest rate

Which one of the following correlation relationships has the potential to completely eliminate risk?

perfectly negative

Which one of the following is the interest rate that the largest commercial banks charge their most creditworthy corporate customers for short-term loans?

prime

interest rates adjusted for the effect of inflation, calculated as the nominal rate minus the inflation rate

real interest rate

Based solely on the maturity preference theory, long-term interest rates:

should be higher than short-term rates.

To reduce risk as much as possible, you should combine assets which have one of the following correlation relationships?

strongly negative

The market segmentation theory states that interest rates on debt vary dependent upon market segments which are segmented based upon which one of the following?

time to maturity

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

unsystematic

The yield value of a 32nd is the change needed in which one of the following to cause a bond's price to change by 1/32nd?

yield to maturity

A portfolio is comprised of two stocks. Stock A comprises 65 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?

βp = (.65 × 1.31) + [(1 - .65) × .98] = .85 + .34 = 1.19