Question 1

Conceptually,why does a bond's price fall when required returns rise on an existing fixed income security?

Accepted Answer

The answer of Conceptually,why does a bond's price fall when...

Question 2

A nine-year maturity AAA-rated corporate bond has a 6 percent coupon rate. The bond's promised yield is currently 5.75 percent and the bond sells for its FPV. The bond pays interest semiannually and has an annual duration of 7.1023 years.
A) What is the bond's convexity?
B) If promised yields decrease to 5.45 percent,what is the bond's predicted new price,including convexity?
C) Based on your result in b,would you prefer to have a bond with more or less convexity? Explain.

Accepted Answer

The answer of A nine-year maturity AAA-rated corporate bond has...

Question 3

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

Accepted Answer

The total return includes the dividends collected over three years ($2 per year for 3 years = $6) plus the capital gain ($47 - $45 = $2), totaling $8. The initial investment was $45, so the total return is $8 on a $45 investment over 3 years. Using the formula for compound annual growth rate (CAGR), we find the rate that makes the initial amount grow to the final amount over the period, which is approximately 5.84 percent.

Question 4

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

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The answer of A 15-year,7 percent coupon annual payment corporate...

Question 5

The preferred stock of ACE pays a constant $1.00 per share dividend. The common stock of ACME just paid a $1.00 dividend per share,but its dividend is expected to grow at 4 percent per year forever. ABLE common stock also just paid a dividend of $1.00 per share,but its dividend is expected to grow at 10 percent per year for five years and then grow at 4 percent per year forever. All three stocks have a 12 percent required return. How much should you be willing to pay for a share of each stock? Which stock will give you the best return? Explain.

Accepted Answer

The answer of The preferred stock of ACE pays a...

Question 6

Which would have a longer duration: (a)a five-year fully amortized installment loan with semiannual payments or (b)a five-year semiannual payment bond,ceteris paribus. Why?

Accepted Answer

The answer of Which would have a longer duration: (a)a...

Question 7

An investor is considering purchasing a Treasury bond with a 16-year maturity,a 6 percent coupon and a 7 percent required rate of return. The bond pays interest semiannually.
A) What is the bond's modified duration?
B) If annual promised yields decrease 30 basis points immediately after the purchase,what is the predicted price change in dollars based on the bond's duration?

Accepted Answer

The answer of An investor is considering purchasing a Treasury...

Question 8

An investor owned a 9 percent annual payment coupon bond for six years that was originally purchased at a 9 percent required return. She did not reinvest any coupons (she kept the money under her mattress). She redeemed the bond at par. What was her annual realized rate of return? What if she did reinvest the coupons but only earned 5 percent on each coupon? Why are your answers not equal to 9 percent?

Accepted Answer

The answer of An investor owned a 9 percent annual...

Question 9

How does an increase in interest rates affect a security's duration?

Accepted Answer

The answer of How does an increase in interest rates...

Question 10

You have five years until you need to take your money out of your investments to make a planned expenditure. Right now bonds are promising an 8 percent return. You buy a five-year duration bond. After you buy the bond,interest rates fall to 6 percent and stay there for the full five years. You reinvest the coupons and earn 6 percent. Will your realized return be more or less than the originally promised 8 percent? Explain.

Accepted Answer

The answer of You have five years until you need...

Question 11

What is convexity? How does convexity affect duration-based predicted price changes for interest rates changes?

Accepted Answer

The answer of What is convexity? How does convexity affect...

Question 12

Explain the effects of coupon and maturity on volatility.

Accepted Answer

The answer of Explain the effects of coupon and maturity...

Quiz 3: Interest Rates and Security Valuation