Question 1

You would typically find all but which one of the following in a bond contract?&#10;A) A dividend restriction clause&#10;B) A sinking fund clause&#10;C) A requirement to subordinate any new debt issued&#10;D) A price earnings ratio

Accepted Answer

A price earnings ratio is a metric used to value a company's shares, not typically found in a bond contract. Bond contracts often include clauses like dividend restrictions, sinking funds, and subordination of new debt to protect bondholders' interests.

Question 2

The ________ of a bond is computed as the ratio of coupon payments to market price.&#10;A) nominal yield&#10;B) current yield&#10;C) yield to maturity&#10;D) yield to call

Accepted Answer

The current yield of a bond is calculated by dividing the annual interest payments (coupon payments) by the bond's current market price. This provides an indication of the income return that an investor can expect to receive from the bond, assuming the bond's price does not change.

Question 3

Consider the following $1 000 par value zero-coupon bonds:&#10;  The expected one-year interest rate two years from now should be ________.&#10;A) 7.00%&#10;B) 8.00%&#10;C) 9.00%&#10;D) 10.00%&#10;

Accepted Answer

11ee763a_a7b8_f07d_90da_a9e424d715b3_TB10008_00

Question 4

Consider the following $1 000 par value zero-coupon bonds:
The expected one-year interest rate two years from now should be ________.

A) 7.00%
B) 8.00%
C) 9.00%
D) 10.00%

9.00%

Accepted Answer

11ee763a_a7b9_178f_90da_4b8447b386a6_TB10008_00

Question 5

Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

A) 5.00%
B) 5.15%
C) 8.15%
D) 9.00%

Accepted Answer

HPR_Nom = 11ee763a_a7b9_1791_90da_5bf3cae92669_TB10008_00

Question 6

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?&#10;A) 4.80%&#10;B) 4.85%&#10;C) 9.60%&#10;D) 9.70%

Accepted Answer

The current yield is calculated by dividing the annual interest payment by the current market price of the bond. The annual interest payment is 4.8% of the bond's face value, which is typically $1000 for bonds, so the annual interest is $48 (4.8% of $1000). The current yield is then $48 / $989.40 = 0.0485 or 4.85%.

Question 7

Growth shares usually exhibit ________ price-to-book ratios and ________ price-to-earnings ratios.&#10;A) low, low&#10;B) low, high&#10;C) high, low&#10;D) high, high

Accepted Answer

Growth shares typically have high price-to-book ratios because investors are willing to pay more for what they perceive as higher future growth in the company's earnings or assets. Similarly, they often exhibit high price-to-earnings ratios as investors are willing to pay a premium for the expected growth in earnings.

Question 8

You run a regression of a share's returns versus a market index and find the following: Based on the data you know that the share  &#10;A) earned a positive alpha that is statistically significantly different from zero&#10;B) has a beta precisely equal to 0.890&#10;C) has a beta that could be anything between 0.6541 and 1.465 inclusive&#10;D) has no systematic risk

Accepted Answer

The answer of You run a regression of a share's...

Question 9

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk-free rate is 5%.  &#10;A) Option A&#10;B) Option B&#10;C) Option C&#10;D) Option D&#10;

Accepted Answer

A) Not possible; two portfolios with different betas cannot have the same expected return.
B) Not possible; under CAPM, market portfolio must yield highest CAL.
C) Not possible; Portfolio A and the market have different excess returns per unit of risk. 11ee763a_a7b9_3ea4_90da_a9abce4947ee_TB10008_00 D) Possible

Question 10

What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?&#10;A) 3.8%&#10;B) 13.1%&#10;C) 15.6%&#10;D) 19.1%

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 3.5% + 0.8 * (15.5% - 3.5%) = 3.5% + 0.8 * 12% = 3.5% + 9.6% = 13.1%.

Question 11

There are two independent economic factors M1 and M2. The risk-free rate is 5% and all shares have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model?

A) E(r_P) = 5 + 1.12?_P1 + 11.86?_P2
B) E(r_P) = 5 + 4.96?_P1 + 13.26?_P2
C) E(r_P) = 5 + 3.23?_P1 + 8.46?_P2
D) E(r_P) = 5 + 8.71?_P1 + 9.68?_P2

Accepted Answer

The answer of There are two independent economic factors M1...

Deck 2: Capital Pricing, Arbitrage Pricing Theory, Bond Prices, Yields, Efficient Market Hypothesis and Behavioral Finance