Which of the following will only be executed if the order's price conditions are met? If you owned 100 shares of FedEx, what was your dollar return? b. Assume that the market is in equilibrium so that expected returns equal required returns. Which of the following are the stock of small companies that are priced below $1 per share? We think they will be useful in estimating future expected return. The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. FedEx Corp. ended the previous year at $96.20 per share. The bond is currently selling at a price below its par value. What will be the change in the bond's price in percentage terms? Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a total increase of $11. Assume interest payments are paid semi-annually and par value is $1,000. the liquidity risk premium on the corporation's bond is 0.50 percent. If you have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company M, what is your portfolio return? The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. This can be expressed in the following formula: expected return (ex-ante) … Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. CAPM is calculated according to the following formula: Where:Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return of the marketNote: “Risk Premium” = (Rm – Rrf)The CAPM formula is used for calculating the expected returns of an asset. The formula is the following. It paid a $1.30 per share dividend last year. Their recent dividend was $.69. Small Cap – Dimensional US Small Cap Index: 11.5%Bonds – Barclays US Aggregate Bond Index: 5.3%. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. Which of these refer to the ease with which an asset can be converted into cash? However, the YTM equals the expected rate of return under certain assumptions. What is the best definition of efficient portfolio? The new appropriate discount rate will be 6.00 percent. In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. It ended last year at $145.50. Stock A has a required return of 15%. The current bond price will increase and interest rates on new bonds will decrease. Once you have completed the test, … if a bonds yield to maturity falls below its coupon rate, the bond must be selling for a price higher than its par value, bond prices are quoted in terms of which of the following, rank the following bonds in order from lowest credit his to highest risk all with the same time to maturity. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. CODES (2 months ago) 11 new "zero Coupon Bonds" Quizlet results have been found in the last 90 days, which means that every 8, a new "zero Coupon Bonds" Quizlet result is figured out. "zero Coupon Bonds" Quizlet - 06/2020. Which of the following statements is correct regarding this information? Which of the following is the asset pricing theory based on a beta, a measure of market risk? Treasury bills, long-term Treasury bonds, stocks. It graphs the relationship between beta (β) and expected return, i.e. The dividend is expected to increase at a 20 percent rate for the next 3 years. What is the main reason for calculating averages of past returns on stocks? Assume a risk free rate of 4.75%. A firm does not pay a dividend. The security has no special covenants. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. What is the average monthly return? Which of these is a theory that describes the types of information that are reflected in current stock prices? A corporate bond with a 5 percent coupon has 10 years left to maturity. Expected return on an asset (r a), the value to be calculated; Risk-free rate (r f), the interest rate available from a risk-free security, such as the 13-week U.S. Treasury bill.No instrument is completely without some risk, including the T-bill, which is subject to inflation risk. At face value, the coupon rate and yield equal each other. Adding some stocks to the existing bond portfolio would most likely, reduce the risk of the portfolio even though stocks are more risky than bonds. If you owned 100 shares of FedEx, what was your percent return? The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. Sally would be best served to: Stock valuation model dynamics make clear that higher discount rates lead to, Stock valuation model dynamics make clear that lower dividend growth rates lead to, When residual cash flows are high, stock values will be, Why is it expected to be using higher discount rates to discount stock dividend payments compared to the discount rates used to discount bond coupon payments, because the cash flows resulting from owning a stock are typically more risky than the cash flows resulting from owning a bond. Year-to-Date, Company O had earned a 2.30 percent return. Risk is reduced without necessarily reducing the expected return. Which of the following is the reward investors require for taking risk? They're customizable and designed to help you study and learn more effectively. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. If you have a portfolio made up of 50 percent Company O, 30 percent Company V, and 20 percent Company M, what is your portfolio return? The annual return on the S&P 500 Index was 11.5 percent. Determine which one of these three portfolios dominates another. Using the CAPM, what is ABC’s expected return? It paid a $0.80 per share dividend last year at $105.80. All of these are investor diversification problems. the expected return on default-free bonds. Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. Which of the following describes what will occur as you randomly add stocks to your portfolio? You have a portfolio with a beta of 1.25. a corporations 10 years bond are currently yielding a return of 7.75 percent. A) 13% What should be YTM for the bond? A fast growing firm recently paid a dividend of $0.50 per share. this implies that, A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. What is the beta of your portfolio? The "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. His firm has a beta of 1.6, the expected return on the market is 11 percent, and the risk-free rate is 3 percent. The expected return and risk of Portfolio Yellow are 15 percent and 19 percent, and for the Purple Portfolio are 12 percent and 18 percent. Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as. Year-to-date, Company O had earned a 3.50 percent return. Which of these is the portion of total risk that is attributable to overall economic factors? Bondholders have a required rate of return of 12%p.a. Easy to use and portable, study sets in Expected Return are great for studying in the way that works for you, at the time that works for you. The market price of the bond is $910.00. (Assume interest payments are paid semi-annually and a par value of $1,000.) The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. A stock with beta equal to 0.4 would most likely be considered, Whenever a set of stock prices go unnaturally high and subsequently crashes down, the market experiences what we call, This is the average of the possible returns weighted by the likelihood of those returns occuring. Stock B has a required return of 8%. If you owned 400 shares of FedEx, what was your dollar return? As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. It ended last year at $131.70. Year-to-date, Company O had earned a 3.60 percent return. Stock A has a required return of 19%. The higher the probability that the return on an investment will not pay off its average promised value, the higher the expected return must be to induce an investor to invest in it. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent. Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. Which of the bonds below would be most liquid? Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. Using a 13 percent discount rate, compute the value of this stock. FedEx Corp. ended the previous year at $96.20 per share. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. Efficient portfolio is a portfolio that is not dominated by any other portfolio. Understand the expected rate of return formula. Which of these are valued as a special zero-growth case of the constant growth rate model? Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. The security has no special covenants. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. What is the standard deviation of monthly returns? A corporate bond with a 5.75 percent coupon has 15 years left to maturity. If the default risk premium and liquidity risk premium on a 10 year corporate bond is the same as that on the 20 year corporate bond, what is the current rate on a 10 year corporate bond? Which of the below is the best description of the effect of portfolio diversification? the liquidity risk premium on the corporation's bond is 0.50 percent. Which of the following statements is correct regarding diversification? All of these statements are valid concerns regarding beta. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. GEN has 10 million shares outstanding and a stock price of $89.25. Which of these is the reward for taking systematic stock market risk? Hence, the outcome is not guaranteed. U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. What is the average monthly return? Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. Ex… the stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends. Stock B has a required return of 26%. What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8. a corporations 10 years bond are currently yielding a return of 7.75 percent. What yield to maturity is the bond offering? If you owned 500 shares of FedEx, what was your percent return? Which of these is a measure summarizing the overall past performance of an investment? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". Which of the below would be correct? Normally, bond investors account for call risk by figuring the yield-to-call, which is the percentage return the bond will pay up to the call date. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. It ended last year at $173.90. This dividend will grow at 11 percent indefinitely. what is the default risk premium on the corporation's 10 year bonds? You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. Which of the following are investor diversification problems? Calculate the maturity risk premium on the two-year Treasury security. It ended last year at $131.70. The annual T-bill yield during the same period was 4.3 percent. taught by Chao Jiang at the University of Kansas. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. (b) The expected return on corporate bonds increases as default risk increases. Which of the following is the continual increase in the price level of a basket of goods or services? Which of the following is one of those assumptions? The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's, Stock valuation model dynamics make clear that higher dividend growth rates lead to, All of the following are stock market indices except, Stock valuation model dynamics make clear that lower discount rates lead to, discounting the future dividends and future stock price appreciation. 23. Given this information which of the following statements is correct? Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. Afterwards, a more stable rate of 10 percent growth rate can be assumed. Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. It is expected to pay its first dividend of $0.10 per share in three years. Currently, GLE, is trading in the market for $51. Which of the following is the model that includes an equation that relates a stock's required return to an appropriate risk premium? Which of the following is a correct statement about the two stocks? The market has an expected rate of return of 9.8 percent. the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. What is GEN's market capitalization? Which of the following is a true statement? Assume that the maturity risk premium is zero. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? it shows expected return as a function of β. The dividend is expected to grow at a 14.5 percent rate. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? When people purchase a stock, they do not know what their return is going to be - either short term or in the long run. Discount bond: a bond that sells below its par value Premium bond: a bond that sell above its par value (2) Yield to maturity (YTM): the return from a bond if it is held to maturity Example: a 10-year bond carries a 6% coupon rate and pays interest semiannually. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. Assume that you observe the following interest rates on the following 20 year bonds: as a bond approaches its maturity we expect the market price of the bond, under which will an investor demand a larger return on a bond, the bond issue is downgraded from a to BBB, which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate, which of the following bond makes no interest payments, if a bond's yield to maturity rises above its coupon rate, the bond must be selling for a price lower than its par value, when we say that a bondholder faces interest rate risk we mean that the bondholder faces the possibility of a ________ in market interest ratios and a _____ in the value of the bond as a result, which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder, consider the following three bonds A treasury note quoted at 87:25 and a corporate bond quoted at 102.42 and a municipal bond quoted at 101.45. if the treasury and corporate bonds have a par value of 1,000 and the municipal bond has a par value of 5,000 what is the price of these three bonds, which of the following is not a factor that determines the coupon rate of its company's bonds, if a bonds selling at a premium then ____, its yield should be lower than its coupon rate. You own $1,000 of City Steel stock that has a beta of 1. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. compounded semi-annually. there is typically not much trading activity related to the security, the rate that a security would pay if no inflation were expected over its holding period, Assume the interest rate demanded on a bond issued by Ford is 7%. If a 13 percent discount rate is appropriate for this stock, what is its value? Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. It also claims that this stock is a "safe bet" for the future. The real rate of interest on the loan is equal to 4%. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. a) The probability of default is zero b) The bond is callable Answer: The probability of default is zero. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. Answer: B Question Status: Previous Edition 35) Which of the following statements are true? The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. 2. What was the market risk premium during that year? A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. Assume when plotting stock Z on a security market line diagram the stock would be found below the security market line. Bond-rating agencies take into account a company's balance sheet and many other factors. week lecture chapter 15: the term structure of interest rate problem sets question under the expectations hypothesis, if the yield curve is upward-sloping, the Expected Return. The average rate of return will give us a high-level view of the profitability of the project and can help us access if it is worth investing in the project or not. ... Stock in Ombor Medical Supplies earns a return of 5.3% annually, while bonds issued by Ombor Medical Supplies earns a return of 4.1% annually. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Name the dominated portfolio and the portfolio that dominates it. It paid a $0.80 per share dividend last year at $105.80. Government Treasury bonds are historically considered the safest bonds. The y-intercept of the SML is equal to the risk-free interest rate, while the slope is equal to the market risk premium (the market’s rate of return minus the risk-free rate). U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. A manager believes his firm will earn a 12 percent return next year. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. At the current stock price of $26.07, what is the return shareholders are expecting? Sally has researched GLE and wants to pay no more than $50 for the stock. It ended last year at $145.50. According to the Fisher Effect equation, the nominal rate of interest is equal to, the real rate of interest plus the inflation rate, the higher the liquidity risk, the higher the interest rate that security buyers will demand, If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a, This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments. If you owned 600 shares of FedEx, what was your percent return? This is a measure of the co-movement between two variables that ranges between -1 and +1, Company A = 71 shares, Company B = 117 shares, Company F = 615 shares. During the same period, Company V earned 1.70 percent and Company M earned -1.20 percent. If the risk-free rate is 3 percent and the market risk premium is 8 percent, what is the required return for the market? FedEx Corp. stock ended the previous year at $136.20 per share. Actual Return: An actual return is the actual gain or loss of an investor. b-1) What is the variance of this portfolio? Currently the portfolio is invested in the following manner. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. FedEx Corp. stock ended the previous year at $118.30 per share. A company has a beta of 0.75. The long-term government bond is expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. What will be the change in the bond's price in dollars? You believe that in one year, the yield to maturity will be 6.25 percent. Company X has a beta of 1.45. Calculate the bond's default risk premium. Which of the following is an electronic stock market without a physical trading floor? Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. Expected return = expected dividend yield + expected capital gains yield g P D g g P D rs 0 0 0 1 ^ *(1) In the above example, 0.05 0.0525 0.05 10.25% 40 *(1 ) 2.00*(1 0.05) 0 0 ^ g P D g rs where 5.25% is the expected dividend yield and 5% is the expected capital gains … If the market return is expected to be 8 percent and the risk free rate is 3 percent, what is the company's required return? It has had a credit rating of BB and a yield to maturity of 6.25 percent. The expected rate of return is the return on investment that an investor anticipates receiving. Calculate the security's equilibrium rate of return. What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8? FedEx Corp. stock ended the previous year with $165.30 per share. The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. Given a required return of 7%, the intrinsic value of this investment is: The correct answer is: $14437 A zero coupon bond has a face value of $2000 and a current price of $624. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. The new appropriate discount rate will be 9 percent. In return for this safety, the bonds return the lowest interest rate. Which of the debt contracts below would be associated with the biggest interest rate risk? As mentioned in the section above, a Sharpe ratio of … the expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. Assume you borrow 100 apples and in 1 year you return 107 apples. What would this position on the diagram imply about stock Z? TC corporate bond with yield of 8.76 percent and B & O corporate bond with a yield of 5.99, under which conditions will an investor demand a smaller return on a bond, if a bonds yield to maturity use above its coupon rate, bond prices must decline at the same time, all of the following items would need to be included in the bond's indenture agreement except, which of these statements answers why bonds are known as fixed income securities, investors know how much they will receive in interest payments, when market interest rates rise we will expect an increase int he yield to maturity on an already outstanding bond, if the coupon rate equals 7% then a corresponding $1,000 face value bond, assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. At … Most common stocks are positively correlated with each other because they are impacted by the same economic factors. Financial analysts believe the stock will be at their target price of $65.00 in two years. Which of the following is a concern regarding beta? Let’s take an example of a portfolio of stocks and bonds where stocks have a 50% weight and bonds have a weight of 50%. The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. Expected return is simply a measure of probabilities intended to show the likelihood that a given investment will generate a positive return, and what the likely return will be. All of the following are necessary conditions for an efficient market EXCEPT: If Zeus Energy Bonds are upgraded from BBB- to BBB+, which of the following statements is true? Also assume inflation rate of 3%. It paid a $0.60 per share dividend last year. If this bond pays its coupon payments semi annually and par value is $1,000 what is the bonds annual coupon rate? 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