The new appropriate discount rate will be 6.00 percent. It paid a $1.30 per share dividend last year. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. A corporate bond with a 5 percent coupon has 10 years left to maturity. Which of these is a measure summarizing the overall past performance of an investment? Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. Stock B has a required return of 26%. Afterwards, a more stable rate of 10 percent growth rate can be assumed. If you owned 400 shares of FedEx, what was your percent return? 2. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. determine the interest payment for the following bonds: 5.5 percent coupon corporate bond 6.45 percent coupon treasury note and a corporate zero coupon bond maturing in 10 years. The current bond price will increase and interest rates on new bonds will decrease. What is the value of their stock when the required rate of return is 15.13 percent? (Assume interest payments are paid semi-annually and a par value of $1,000.) "zero Coupon Bonds" Quizlet - 06/2020. Year-to-Date, Company O had earned a 2.30 percent return. As mentioned in the section above, a Sharpe ratio of … Firms can quite possibly change their stocks' risk level by substantially changing their business. Their recent dividend was $.69. All of these statements are valid concerns regarding beta. (Assume semi-annual interest payments and $1,000 par value.). 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 following is one of those assumptions? 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. Calculate the maturity risk premium on the two-year Treasury security. Calculate the security's equilibrium rate of return. We think they will be useful in estimating future expected return. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. b. Please show all work and formulas. FedEx Corp. stock ended the previous year with $165.30 per share. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? Which of the following is the correct ranking from least risky to most risky? A company has a beta of 0.75. The larger the standard deviation, the higher the total risk. At … This is an example of a market underreaction. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. Which of the following is a true statement? It ended last year at $145.50. Rank the following three stocks by their level of total risk, highest to lowest. Bond-rating agencies take into account a company's balance sheet and many other factors. The dividend is expected to grow at a 14.5 percent rate. They're customizable and designed to help you study and learn more effectively. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. 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%. Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. what is the default risk premium on the corporation's 10 year bonds? Price of the bond with the required rate of return: PV ($1,152.12) FV $1,000.00 PMT 120 N 15 I 10% Given your required rate of return, you would value the bond to be worth $1,152.12 today. Which of the following is the asset pricing theory based on a beta, a measure of market risk? A manager believes his firm will earn a 12 percent return next year. 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. Which of the following is an electronic stock market without a physical trading floor? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. It is expected to pay its first dividend of $0.10 per share in three years. a corporations 10 years bond are currently yielding a return of 7.75 percent. Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. Understand the expected rate of return formula. What is the standard deviation of monthly returns? 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. The security has no special covenants. It ended last year at $173.90. 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 market has an expected rate of return of 9.8 percent. You have a portfolio with a beta of 1.25. FedEx Corp. ended the previous year at $96.20 per share. What is the average monthly return? The expected return of stocks is 15% and the expected return for bonds is 7%.Expected Return is calculated using formula given belowExpected Return for Portfolio = Weight of Stock * Expected Return for Stock + Weight of Bond * Expected Return for Bond 1. Which of the below is the best description of the effect of portfolio diversification? If you owned 400 shares of FedEx, what was your dollar return? (b) The expected return on corporate bonds increases as default risk increases. 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. 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. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. Most common stocks are positively correlated with each other because they are impacted by the same economic factors. The "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. 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. If a 13 percent discount rate is appropriate for this stock, what is its value? 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. Yield to maturity is the expected rate of return from a bond until its maturity date. All of these are investor diversification problems. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? 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? A bond issued by the United States government, common stock issued by a small but financially strong firm. Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. It is based on the idea of systematic risk (otherwise known as or non-diversifiable risk) and that investors need to be compensated for it in the for… Which of the bonds below would be most liquid? Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. This dividend will grow at 11 percent indefinitely. Using the CAPM, what is ABC’s expected return? a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? If you owned 600 shares of FedEx, what was your percent return? What will be the change in the bond's price in dollars? You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). What was the market risk premium during that year? During the same time period, Company V earned -2.50 percent and Company M earned 1.60 percent. Which of the following will only be executed if the order's price conditions are met? The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 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. Which of these is similar to the capital market line, except that risk is characterized by beta instead of standard deviation? 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). If the risk-free rate is 3 percent and the market risk premium is 8 percent, what is the required return for the market? Which of the following are the stock of small companies that are priced below $1 per share? What is the best definition of efficient portfolio? Which of these is the term for portfolios with the highest return possible for each risk level? 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 maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. It ended last year at $131.70. It paid a $0.80 per share dividend last year at $105.80. A corporate bond with a 5.75 percent coupon has 15 years left to maturity. in an efficient market, investors will sell overvalued stock which will drive its price down, This is typically considered the return on U.S. government bonds and bills and equals the real interest and the expected inflation premium. Assume that the market is in equilibrium so that expected returns equal required returns. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. The bond is currently selling at a price below its par value. Which of the following are investor diversification problems? A portfolio manager is managing a $10 million portfolio. If you owned 500 shares of FedEx, what was your dollar return? 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. The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. Calculate the bond's default risk premium. a corporations 10 years bond are currently yielding a return of 7.75 percent. 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. 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