Quiz ch 15 and 16
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Quiz ch 15 & 16
Ch 15
1. A 7% annual pay bond, issued at par, was purchased for 102. One year later, it was called at a price of
101. What is the rate of return enjoyed by the investor?
a) 4.9%
b) 5.9%
c) 6.0%
d) 7.0%
2. Which of the following is true with respect to the relationship between inflation, real rates of return,
and nominal rates of return?
a) The higher the inflation rate, the higher the real rate of return required by an investor.
b) The higher the inflation rate, the higher the nominal rate of return required by an investor.
c) The higher the inflation rate, the higher the real rate and nominal rate of return required by an
investor.
d) Inflation does not impact either real or nominal rates of return required by an investor.
3. The risk-free rate of return is represented by…
a) T-bills.
b) short-term government bonds.
c) long-term government bonds.
d) There is no such thing as a risk-free rate of return.
4. Which of the following securities has business risk associated with it?
a) common shares
b) common shares and secured corporate debt
c) common shares and unsecured corporate debt
d) common shares, secured corporate debt and unsecured corporate debt
5. Which of the following is not one of the common statistically-based measures of risk for an individual
security?
a) beta
b) variance
c) correlation
d) standard deviation
6. An investor has a $250,000 portfolio. 70% is in Security One which returns 10% over the year. The
remaining 30% is in Security Two which returns 5%. The value of the portfolio in one year’s time is…
a) $268,750
b) $271,250
c) $272,500
d) Insufficient information
7. Which of the following is the preferred correlation when adding a single security to an already well-
diversified portfolio?
a) –1.0
b) 0.0
c) 0.5
d) 1.0
8. An investor is looking to add a security to an existing portfolio. The expected return of the current
portfolio is 8% and its standard deviation is 15. The expected return of the security is 8.5% and its
standard deviation is 15. There is a correlation of 0.0 between this security and the existing portfolio.
Which of the following best describes the impact of adding the security to the portfolio?
a) Adding the security will increase the expected return and reduce the risk.
b) Adding the security will increase the expected return and not impact the risk.
c) Adding the security will increase the expected return and increase the risk.
d) Adding the security will increase the expected return and it is unclear how the risk will be impacted.
9. You are examining two companies. Company One has a beta of 1.2 and Company Two has a beta of .8.
It is most likely that…
a) Company One tends to be more profitable than Company Two.
b) Company Two tends to be more profitable than Company One.
c) Company One is a defensive stock and Company Two is a cyclical stock.
d) Company Two is a defensive stock and Company One is a cyclical stock.
10. In the correct order, the first three steps of the portfolio management process are:
a) determining investment objectives and constraints; designing an investment policy statement; and
implementing the asset allocation
b) designing the investment policy statement; implementing the asset allocation; and monitoring the
economy, the markets, the portfolio and the client
c) determining investment objectives and constraints; designing an investment policy statement; and
formulating an asset allocation strategy and selecting investment styles
d) determining investment objectives and constraints; formulating an asset allocation strategy and
selecting investment styles; and designing an investment policy statement
11. The client’s risk tolerance should be matched to…
a) the risk of each security in the portfolio.
b) the risk of the average security in the portfolio.
c) the risk of the riskiest security in the portfolio.
d) the risk of the overall portfolio.
12. Sylvia Wong is a 35 year old single professional. For financial planning purposes, her time horizon
should be understood as the present…
a) until she needs the money.
b) until the next major expected change in her life.
c) until her retirement.
d) until her death.
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Ch 16
13. Which of the following is not considered to be a fixed income product for asset mix purposes?
a) mortgages
b) strip bonds
c) preferred shares
d) convertible bonds
14. Which of the following is considered to be an equity product for asset mix purposes?
a) rights
b) index options
c) exchange-traded funds
d) All of the above
15. The expansion phase of the equity cycle tends to correspond to which phase of the business cycle?
a) trough
b) recovery
c) expansion
d) peak
16. During the peak phase of the equity cycle, the recommended fixed-income strategy is to hold...
a) short-term bonds.
b) medium-term bonds.
c) long-term bonds.
d) A laddered bond portfolio.
17. The recommended strategy in the stock market trough of the equity cycle is to…
a) sell stocks and buy long-term bonds.
b) sell stocks and sell long-term bonds.
c) sell long-term bonds and buy cyclical stocks.
d) sell long-term bonds and buy short-term bonds.
18. What are the two factors that, in combination, generally account for 80% to 90% of the change in
stock market prices?
a) Interest rate trends and economic trends.
b) Interest rate trends and flow of funds trends.
c) Economics trends and government policy trends.
d) Government policy trends and flow of funds trends.
19. Which of the following equity manager styles tends to expose the investor to the greatest amount of
risk during times of recession?
a) value
b) growth
c) top-down
d) bottom-up
20. For the sector rotator equity manager...
a) stock selection is more important than industry selection and small cap stocks are generally
purchased.
b) industry selection is more important than stock selection and small cap stocks are generally
purchased.
c) stock selection is more important than industry selection and large cap stocks are generally purchased.
d) industry selection is more important than stock selection and large cap stocks are generally
purchased.
21. A middle-aged investor with a long time horizon and high tolerance for risk comes to you for
investment advice. The most appropriate asset allocation for this individual would be:
a) 50% cash, 30% bonds, 20% equities
b) 30% cash, 40% bonds, 30% equities
c) 10% cash, 30% bonds, 60% equities
d) 0% cash, 20% bonds, 80% equities
22. A risk-averse 65 year old with a high need for income in her portfolio comes to you for investment
advice. The most appropriate portfolio for this individual would be…
a) 10% cash, 65% bonds, 25% equities
b) 40% cash, 40% bonds, 20% equities
c) 50% cash, 50% bonds, 0% equities
d) 60% cash, 40% bonds 0% equities
23. An investor’s $400,000 portfolio has a long-term strategic asset allocation of 50% equities, 30%
bonds and 20% cash. Over a year, equities fall by 10% while bonds increase 10%. Cash is unchanged. In
order to rebalance the portfolio to the strategic allocation, the portfolio manager should…
a) buy $16,000 worth of equities, sell $14,400 worth of bonds, and buy $1,600 worth of cash.
b) buy $16,000 worth of equities, sell $14,400 worth of bonds, and sell $1,600 worth of cash.
c) buy $14,400 worth of equities, sell $16,000 worth of bonds, and buy $1,600 worth of cash.
d) buy $20,000 worth of equities, sell $18,000 worth of bonds, and sell $2,000 worth of cash
24. When an analyst is comparing the Sharpe ratios of different portfolios, she should look for the…
a) lowest positive number possible.
b) lowest negative number possible.
c) highest positive number possible.
d) highest negative number possible.
25. A negative Sharpe ratio means that…
a) the portfolio lost money.
b) the portfolio’s return was less than the risk-free rate.
c) the portfolio’s return was less than that of the benchmark.
d) the portfolio’s return was less that that of the benchmark minus the risk-free rate.
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1.B 15 – 6/7.
[(101 – 102) + 7] / 102 = 5.9%.
2.B 15 – 9.
3.A 15 – 10.
4.D 15 – 10.
5.C 15 – 11/12.
6.B 15 – 12/13.
$250,000 x .70 x 1.1 + $250,000 x .30 x 1.05 = $271,250.
7.A 15 – 14/15.
8.A 15 – 13/15.
9.D 15 – 16.
10.C 15 – 15/17.
11.D 15 – 18/19.
12.B 15 – 22.
13.D 16 – 5.
14.D 16 – 6.
15.C 16 – 10.
16.A 16 – 10.
17.C 16 – 10.
18.A 16 – 11.
19.B 16 – 12/13.
20.D 16 – 14/15.
21.C 16 – 18/19.
22.A 16 – 18/19.
23.B 16 – 19/20.
The portfolio is worth $400,000 and $200,000 is equities, $120,000 is bonds and $80,000 is cash. At the
end of the year, the equities are worth $180,000, the bonds are worth $132,000, and the cash is worth
$80,000. The portfolio is worth $392,000. The new allocation should be $196,000 equities, $117,600 in
bonds, and $78,400 in cash. Therefore, $16,000 in equities should be purchased and $14,400 in bonds
and $1,600 in cash sold.
24.C 16 – 25.
25.B 16 – 26
Related Questions
K
Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods):
0
2
5
Period
$19.53
a. What is the maturity of the bond (in years)?
b. What is the coupon rate (as a percentage)?
c. What is the face value?
Cash Flows
View an example Get more help.
★
a. What is the maturity of the bond (in years)?
The maturity is years. (Round to the nearest integer.)
A
6
1
MacBook Pro
&
7
$19.53
*
8
9
C
59
$19.53
60
$19.53+$1,000
Clear all
BUB
0
{
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Consider the following two Treasury securities:
Bond
Price
Modified duration (years)
A
$100
6
B
$80
7
For a 25 basis-point change in interest rates, which bond has the greatest percentage change in price?
A.
Bond A
B.
Bond B
C.
Can't be determined
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3. Use the data in the following table on Treasury securities of different maturities to solve this
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1 year
2 year
Зуеar
1.25%
2%
2.50%
Assume that the liquidity premium theory is correct. On this day, what did investors expect the
interest rate to be on the one-year Treasury bill two years from that time if the term premium on a
two-year Treasury note was 0.20%, and the term premium on a three-year Treasury note was
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The following table showing the cash flows for TIPS bonds.
Inflation in Year Just
Ended
Time
0123
2.25%
5.00
3.50
Par Value
$ 1,000.00
1,022.50
1,073.63
1,111.20
Coupon Payment + Principal Repayment =
$ 46.01
$0
0
48.31
50.00
1,111.20
Required:
a. What is the nominal rate of return on the bond in year 2? If real rate of return is 4.50% per annum
b. What is the real rate of return in year 2?
c. What is the nominal rate of return on the bond in year 3?
d. What is the real rate of return in year 3?
Total Payment
$46.01
48.31
1,161.21
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Consider the following:
Price
Yield to maturity
Periods to maturity
Modified duration
Fixed-rate Bond Fixed-rate Note
107.18
5.00%
18
6.9848
100.00
5.00%
8
3.5851
a. For an increase in interest rates of 100 basis points, determine the change in value for the fixed-rate note.
Show your work.
b. For an increase in interest rates of 100 basis points, determine the change in value for the fixed-rate bond.
Show your work.
c. Which of the two fixed-rate securities are more sensitive to increases interest rates? Why?
d. What would be the most appropriate course of action to take given interest rates are expected to rise?
Explain carefully.
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During a period of severe inflation, a bond offered a nominal HPR of 87% per year. The
inflation rate was 78% per year.
a. What was the real HPR on the bond over the year? (Round your answer to 2
decimal places.)
Real HPR
%
b. Find the approximation rreal ľnom i.
Approximation
%
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K
Assume that a bond will make payments every six months as shown on the following
timeline (using six-month periods):
Period
0
2
Cash Flows
$19.12
$19.12
a. What is the maturity of the bond (in years)?
b. What is the coupon rate (as a percentage)?
c. What is the face value?
a. What is the maturity of the bond (in years)?
The maturity is
years. (Round to the nearest integer.)
39
$19.12
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Financial Accounting
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Question 1. Duration and Banking
Consider a 5-year bond with annual coupon payments. The bond has a face value (prin-
cipal) of $100 and sells for $95. Its coupon rate is 3%. (The coupon rate is the ratio
between the coupon value and the face value). The face value is paid at the maturity
year in addition to the last coupon payment.
1. Calculate the bond's yield to maturity (YTM) and duration using its YTM.
2. Suppose the bond's YTM changes in the same way as a 5-year T-bill interest rate.
Use the bond's modified duration to evaluate the relative change in the 5-year bond's
value if the interest rate on 5-year T-bills falls by one basis point, that is, by 0.0001.
This part was extracted from the balance sheet of the First Bank of Australia:
Assets (Billion AUD)
Bond 80
Liabilities (Billion AUD)
Fixed-rate liabilities 60
where "Bond" here refers to the bond we specified above and the fixed-rate liabilities
(banks future payment obligations) have an average duration of 4 years and YTM of…
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K
Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods):
Period
2
Cash Flows
1
$20.34
a. What is the maturity of the bond (in years)?
b. What is the coupon rate (as a percentage)?
c. What is the face value?
$20.34
a. What is the maturity of the bond (in years)?
The maturity is years. (Round to the nearest integer.)
b. What is the coupon rate (as a percentage)?
The coupon rate is%. (Round to two decimal places.)
c. What is the face value?
The face value is $
(Round to the nearest dollar.)
19
$20.34
20
$20.34 + $1,000
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5-year Treasury bonds yield 5.7%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
Select the correct answer.
a. 2.86%
b. 3.40%
c. 3.13%
d. 3.67%
e. 3.94%
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5-year Treasury bonds yield 5.8 %. The inflation premium (IP) is 1.9 %, and the maturity risk premium (MRP) on 5 -
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e. 4.78%
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According to the expectations theory of the term structure of interest, if the 1-year bond rate today is 6% p.a. and the 2-year bond rate today is 7% p.a., what is the 1-year bond rate next year?
A. 6%
B. 6.75%
C. 7.5%
D. 8%
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Question 4
The following is a list of prices today for bonds with different maturities. Face value is 100. Assume that the bonds pay their coupons annually, and that the YTMs in the table are annualized and compounded annually. Both coupon rate and yield to maturity (YTM) is in percent.
Maturity (years) Price Coupon rate YTM 1 98.00 0 ?2 100 ? 5.00 3?9 6.00
Fill in the missing values in the table.What are the annualized spot rates for years 1 & 2 (r1 & r2)?
Given r1 & r2, what is the price of a 2-year coupon bond with annual coupon rate of 7%? What is the duration of this bond?
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Consider the following bonds:
Bond
A
B
CD
с
Coupon Rate (annual payments)
0.0%
0.0%
4.3%
7.7%
The percentage change in the price of bond A is |___%.
(Round to one decimal place.)
What is the percentage change in the price of each bond if its yield to maturity falls from 6.9% to 5.9%?
The percentage change in the price of bond B is %.
(Round to one decimal place.)
Maturity (years)
15
The percentage change in the price of bond C is %.
(Round to one decimal place.)
The percentage change in the price of bond D is %.
21500
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U1
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1
Roy's Welding's bond has an annual rate of return of 5.97 percent and a face value of $1,000. The current rate
of inflation is 3.02 percent. What is the real rate of return on these bonds?
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Can someone help me pls. Thank you!
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Suppose that the term structure of interest rates is:
t 0.5 1
1.5
2
r
1% 1.2% 1.4%
1.8%
Interest rates are annual interest rates that are semi-annually compounded.
1. Calculate the price and modified duration of a 1-year bond with a 6% coupon rate, with coupons paid
semi-annually. The bond has a face value of 100.0
2. Calculate the price and modified duration of a 2-year bond with a 10% coupon rate, with coupons paid
semi-annually. The bond has a face value of 100.0
3. Compare your results from 1 and 2 above. Which bond is more sensitive to changes in interest rates?
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f the nominal rate of return on an Aksoy Corporation bond is 9%, the risk premium is 4%, and the inflation premium is 2%, what is the pure rate of interest?
a.
0%,
b.
6.08%.
c.
2.75%.
d.
3%.
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