A. Contrast the nominal rate of interest with the real rate of interest. B. Why would “a belief in the segmented markets theory of the term structure” implies “a belief in market inefficiency”. C. Suppose you purchased a stock at the end of 2017 and sold it at the end of 2019. The year-end stock prices are shown below and the stock paid no dividends. 2017 2018 2019 $100 $112 $100
Question 4
A. Contrast the nominal rate of interest with the real rate of interest.
B. Why would “a belief in the segmented markets theory of the term structure” implies “a belief in market inefficiency”.
C. Suppose you purchased a stock at the end of 2017 and sold it at the end of 2019. The year-end stock prices are shown below and the stock paid no dividends.
|
2017 |
2018 |
2019 |
|
$100 |
$112 |
$100 |
(i). Compute the average annual return according to the arithmetic mean method.
(ii). Compute the average annual return according to the geometric mean method.
(iii). Compare the results in (i) and (ii), and indicate which is more intuitively appealing in assessing the performance of your investment.
Question 5
A. What does it mean to say that a bond has a value less than one for its relative yield differential? What might account for such a difference?
B. Why is the maturity of some bonds ambiguous?
C. Assume the following characteristics for a particular bond:
Face value=$1000
Annual coupon payment=$60
(First payment due in 1 year)
Internal yield to maturity = 7%
Term= 3 years
(i). Compute the Macaulay duration of the bond.
(ii). Given your answer to part (i), compute the approximate change in the bond’s value if the internal yield fell to 6.5 percent. (You should use the duration in part (i) for this computation.)
(iii). Compute the actual change in the bond’s value.
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