Midterm 3 Review
Which one of the following statements best defines the efficient market hypothesis?
All securities in an efficient market are zero net present value investments
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?
U.S. Treasury bills
What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?
0 percent (tricky question, there is no risk premium for T-bill because its risk-free)
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon (The higher a bond or bond fund's duration, the more sensitive the bond or bond fund to changes in interest rates) (Bonds offering lower coupon rates generally will have higher interest rate risk )
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient
Which of the following applies to a premium bond?
Coupon Rate > Current Yield > Yield to Maturity
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond (both high yield and high risk)
Which one of the following statements applies to NASDAQ?
Multiple market maker system
Standard deviation is a measure of which one of the following?
Volatility
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?
Weak
Which one of these equations applies to a bond that currently has a market price that exceeds par value?
Yield to maturity < Coupon rate
Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ________ than the stock of Dixie South.
capital gains yield R( Required return of the stock)= Dividend yield + Capital gains yield Equation: R= D1 / P 0 + g
An agent who maintains an inventory from which he or she buys and sells securities is called a:
dealer.
The average compound return earned per year over a multiyear period is called the ________ average return.
geometric
Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
in registered form.
To convince investors to accept greater volatility, you must:
increase the risk premium.
The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.
next year's (Annual Dividend yield= D1/current stock price)
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
.05/(1 − t*) = .07.
