A 6.75 percent coupon bond with 26 years left to maturity can be called in six years. The call premium is one year of coupon payments. It is offered for sale at $1,135.25. What is the yield to call of the bond? (Assume interest payments are semiannual.)
> Suppose we observe the following rates: 1R1 = 0.75%, 1R2 = 1.20%, and E(2r1) = 0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?
> The Wall Street Journal reports that the rate on 3-year Treasury securities is 5.25 percent and the rate on 4-year Treasury securities is 5.50 percent. The 1-year interest rate expected in three years is, E(4r1), 6.10 percent. According to the liquidity
> The Wall Street Journal reports that the rate on 4-year Treasury securities is 1.60 percent and the rate on 5-year Treasury securities is 2.15 percent. According to the unbiased expectations theories, what does the market expect the 1-year Treasury rate
> Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%. If the unbiased expectations theory of the term structure of interest rates holds, what is the 1-year interest rate expected one year from now, E(2r1)?
> Suppose you were the financial manager for a firm and were considering a proposed increase in the amount of debt in the firm’s capital structure. If you thought the firm was going to consistently earn a level of EBIT above its break-even level of EBIT (b
> Nikki G’s Corporation’s 10- year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next ten years. The liquidity ris
> Tom and Sue’s Flowers, Inc.’s, 15-year bonds are currently yielding a return of 8.25 percent. The expected inflation premium is 2.25 percent annually and the real risk-free rate is expected to be 3.50 percent annually over the next 15 years. The default
> A fast growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is approp
> One-year Treasury bills currently earn 2.25 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.45 percent and that two years from now, 1-year Treasury bill rates will increase to 2.95 percent. The liquidity premium
> One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent. The liquidity premium on 2-year securities is 0.05 percent. If the liquidity premium theory is correct, what
> One-year Treasury bills currently earn 2.15 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.65 percent and that two years from now, 1-year Treasury bill rates will increase to 3.05 percent. If the unbiased expect
> One-year Treasury bills currently earn 1.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securitie
> A 2-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50 percent per year. Calculate the maturity risk premium on th
> Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.25 percent and maturi
> You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.25 percent. Your broker has determined the following informat
> On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero-coupon Treasury security rates were as follows:
> If an investor wanted to reduce the risk of a levered stock in their portfolio, how could they go about doing so while still retaining shares in the company?
> Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:
> A fast growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 13 percent discount rate is appropr
> Based on economists’ forecasts and analysis, 1-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: R1 = 0.65% E(2r1) = 1.75% L2 = 0.05% E(3r1) = 1.85% L3 = 0.10% E(4r1) = 2.15% L4 = 0.12%
> Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
> Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
> A recent edition of The Wall Street Journal reported interest rates of 1.25 percent, 1.60 percent, 1.98 percent, and 2.25 percent for 3-year, 4-year, 5-year, and 6-year Treasury security yields, respectively, According to the unbiased expectation theory
> From discussions with your broker, you have determined that the expected inflation premium is 1.35 percent next year, 1.50 percent in year 2, 1.75 percent in year 3, and 2.00 percent in year 4 and beyond. Further, you expect that real risk-free rates wil
> What is the difference in the trading volume between Treasury bonds and corporate bonds? Give examples and/or evidence.
> Explain why high income and wealthy people are more likely to buy a municipal bond than a corporate bond.
> Explain how a bond’s interest rate can change over time even if interest rates in the economy do not change.
> Why does a Treasury bond offer a lower yield than a corporate bond with the same time to maturity? Could a corporate bond with a different time to maturity offer a lower yield? Explain.
> The average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these ten years?
> Campbell Supper Co. paid a $0.632 dividend per share in 2013, which grew to $0.76 in 2016. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the required return is 8.7 percent?
> What is the purpose of computing the equivalent taxable yield of a municipal bond?
> What is the yield to call and why is it important to a bond investor?
> Compare and contrast the advantages and disadvantages of the current yield computation versus yield to maturity calculations.
> All else equal, which bond’s price is more affected by a change in interest rates, a bond with a large coupon or a small coupon? Why?
> All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why?
> Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond.
> Provide the definitions of a discount bond and a premium bond. Give examples.
> Explain how mortgage-backed securities work.
> List the differences between the new TIPS and traditional Treasury bonds.
> What does a call provision allow issuers to do, and why would they do it?
> Waller Co. paid a $0.286 dividend per share in 2006, which grew to $0.55 in 2012. This growth is expected to continue. What is the value of this stock at the beginning of 2013 when the required return is 13.7 percent?
> If the risk-free rate is 4 percent and the risk premium is 6 percent, what is the required return?
> Describe the difference between a bond issued as a high-yield bond and one that has become a “fallen angel.”
> You have a portfolio of three bonds. The Long Bond will mature in 19 years and has a 5.5% coupon rate. The Midterm Bond matures in 9 years and has a 6.6% coupon rate. The Short Bond matures in only 2 years and has a 4% coupon rate. A. Construct a spread
> Say that in June of this year, a company issued bonds that are scheduled to mature in three years in June. The coupon rate is 5.75 percent and is paid semiannually. The bond issue was rated AAA. a. Build a spreadsheet that shows how much money the firm p
> Land’o’Toys is a profitable, medium-sized, retail company. Several years ago, it issued a 6½ percent coupon bond, which pays interest semiannually. The bond will mature in ten years and is currently price
> A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
> A client in the 39 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar-risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?
> A 5.25 percent coupon bond with 14 years left to maturity can be called in four years. The call premium is one year of coupon payments. It is offered for sale at $1,075.50. What is the yield to call of the bond? (Assume interest payments are semiannual
> A 4.30 percent coupon bond with 14 years left to maturity is offered for sale at $943.22. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
> Suppose that a firm’s recent earnings per share and dividend per share are $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fa
> A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity is the bond offering? (Assume interest payments are semiannual.)
> If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?
> Calculate the price of a 5.7 percent coupon bond with 22 years left to maturity and a market interest rate of 6.5 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Calculate the price of a 5.2 percent coupon bond with 18 years left to maturity and a market interest rate of 4.6 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Compute the price of a 5.6 percent coupon bond with ten years left to maturity and a market interest rate of 7.0 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Compute the price of a 3.8 percent coupon bond with 15 years left to maturity and a market interest rate of 6.8 percent. (Assume interest payments are semiannual.) Is this a discount or premium bond?
> Consider a 2.25 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 197.1 and was at 203.8 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?
> Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. At the beginning of this year, the CPI was 193.5 and was at 199.6 at the end of the year. What was the capital gain of the TIPS in dollars and in percentage terms?
> A corporate bond with a 6.5 percent coupon has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The n
> A 3.85 percent coupon municipal bond has 18 years left to maturity and has a price quote of 103.20. The bond can be called in eight years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, t
> Consider a firm that had been priced using an 11.5 percent growth rate and a 13.5 percent required return. The firm recently paid a $1.50 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12 percent rate.
> You are a risk adverse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?
> If an investor’s desired risk level changes over time, should the investor change the composition of his or her portfolio? How?
> Many employees believe that their employer’s stock is less likely to lose half of its value than a well diversified portfolio of stocks. Explain why this belief is erroneous.
> You own only two stocks in your portfolio but want to add more. When you add a third stock, the total risk of your portfolio declines. When you add a tenth stock to the portfolio, the total risk declines. Adding which stock, the third or the tenth, like
> Suppose that Lil John Industries’ equity is currently selling for $27 per share and that there are 2 million shares outstanding. The firm also has 50 thousand bonds outstanding, which are selling at 103 percent of par. If Lil John was considering an acti
> Describe the diversification potential of two assets with a −0.8 correlation. What’s the potential if the correlation is +0.8?
> What does diversification do to the risk and return characteristics of a portfolio?
> You receive an investment newsletter advertisement in the mail. The letter claims that you should invest in a stock that has doubled the return of the S&P 500 Index over the last three months. It also claims that this stock is a surefire safe bet for the
> What does the coefficient of variation measure? Why is a lower value better for the investor?
> Can a company change its total risk level over time? How?
> Which company is likely to have lower total risk, General Electric or Coca-Cola? Why?
> What are the two components of total risk? Which component is part of the risk-return relationship? Why?
> How do we define risk in this chapter and how do we measure it?
> Characterize the historical return, risk, and risk-return relationship of the stock, bond and cash markets.
> Why is the percentage return a more useful measure than the dollar return?
> Suppose that Papa Bell, Inc.’s, equity is currently selling for $45 per share, with 4 million shares outstanding. The firm also has seven thousand bonds outstanding, which are selling at 94 percent of par. If Papa Bell was considering an active change to
> Say you own 200 shares of Mattel and 100 shares of Staples. Would your portfolio return be different if you instead owned 100 shares of Mattel and 200 shares of Staples? Why?
> Many more types of investments are available besides stocks, bonds, and cash securities. Many people invest in real estate and in precious metals, primarily gold. What are the risk and return characteristics of these investments and do they provide diver
> If you own 400 shares of Xerox at $17.34, 500 shares of Qwest at $8.15, and 350 shares of Liz Claiborne at $44.73, what are the portfolio weights of each stock?
> Compute the standard deviation of PG&E’s monthly returns shown in Problem 9-16.
> Compute the standard deviation of Kohls’ monthly returns shown in Problem 9-15.
> The past five monthly returns for PG&E are −3.17 percent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return?
> The past five monthly returns for Kohl’s are 4.11 percent, 3.62 percent, −1.68 percent, 9.25 percent, and −2.56 percent. What is the average monthly return?
> At the beginning of the month, you owned $5,500 of General Dynamics, $7,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 7.44 percent, −1.36 percent, and −0.54 percent. What is your portfolio return
> If you own 200 shares of Alaska Air at $42.88, 350 shares of Best Buy at $51.32, and 250 shares of Ford Motor at $8.51, what are the portfolio weights of each stock?
> Consider the characteristics of the following three stocks: The correlation between Pic Image and Tax Help is 0.88. The correlation between Pic Image and Warm Wear is −0.21. The correlation between Tax Help and Warm Wear is â
> GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&ac
> Consider the characteristics of the following three stocks: The correlation between Thumb Devices and Air Comfort is −0.12. The correlation between Thumb Devices and Sport Garb is −0.21. The correlation between Air Com
> Assess the risk-return relationship in T-bills (see Tables 9.2 and 9.4) during each decade since 1950.
> Assess the risk-return relationship of the bond market (see Tables 9.2 and 9.4) during each decade since 1950.
> At the beginning of the month, you owned $6,000 of News Corp, $5,000 of First Data, and $8,500 of Whirlpool. The monthly returns for News Corp, First Data, and Whirlpool were 8.24 percent, −2.59 percent, and 10.13 percent. What’s your portfolio return?
> Year to date, Yum Brands had earned a 3.80 percent return. During the same time period, Raytheon earned 4.26 percent and Coca-Cola earned −0.46 percent. If you have a portfolio made up of 30 percent Yum Brands, 30 percent Raytheon, and 40 percent Coca- C
> Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonalds earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDo
> An investor owns $3,000 of Adobe Systems stock, $6,000 of Dow Chemical, and $7,000 of Office Depot. What are the portfolio weights of each stock?
> An investor owns $6,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $5,000 of Office Depot. What are the portfolio weights of each stock?
> Determine which one of the three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Green has an expected return of 15 percent and risk of 21 percent. The expected return and risk of portfolio Red
> Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 12 percent and risk of 18 percent. The expected return and risk of portfolio Yello
> NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm&
