Homework 5

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

decrease

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

will generate a positive alpha

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on long-term bonds than on short-term bonds

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.

earnings retention ratio will increase

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

Everything else equal, which variable is negatively related to the intrinsic value of a company?

k

Which one of the following is a common term for the market consensus value of the required return on a stock?

market capitalization rate

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

puttable