11) What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Name the dominated portfolio and the portfolio that dominates it. The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. This dividend will grow at 11 percent indefinitely. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. Year-to-date, Company O had earned a 3.60 percent return. It paid a $1.30 per share dividend last year. Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. What will be the change in the bond's price in dollars? 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. Stock A has a required return of 15%. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. Which of these is the term for portfolios with the highest return possible for each risk level? The new appropriate discount rate will be 9 percent. As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims. Which of the following statements is correct regarding diversification? the liquidity risk premium on the corporation's bond is 0.50 percent. We think they will be useful in estimating future expected return. If you have a portfolio made up of 40 percent Company O, 40 percent Company V, and 20 percent Company M, what is your portfolio return? 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. 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… 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? Which of these is a theory that describes the types of information that are reflected in current stock prices? As mentioned in the section above, a Sharpe ratio of … Afterwards, a more stable rate of 10 percent growth rate can be assumed. 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? Which of these is a measure summarizing the overall past performance of an investment? What is the average monthly return? Assume that the maturity risk premium is zero. A corporate bond with a 5 percent coupon has 10 years left to maturity. (Assume semi-annual interest payments and $1,000 par value.). 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. It ended last year at $131.70. Expected return is based on historical data, so investors should take into consideration the likelihood that each security will achieve its historical return given the current investing environment. 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. A two-year Treasury security currently earns 5.13 percent. Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. 23. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. 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 The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. Bond-rating agencies take into account a company's balance sheet and many other factors. Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. Calculate the maturity risk premium on the two-year Treasury security. taught by Chao Jiang at the University of Kansas. 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? Sally has researched GLE and wants to pay no more than $50 for the stock. What is the best definition of efficient portfolio? A corporate bond with a 5.75 percent coupon has 15 years left to maturity. Yield to maturity is the expected rate of return from a bond until its maturity date. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. Which of these are valued as a special zero-growth case of the constant growth rate model? Assume a risk free rate of 4.75%. Risk is reduced without necessarily reducing the expected return. 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 "givens" in this formula are the probabilities of different outcomes and what those outcomes will return. What is the change in price the bond will experience in dollars? Stock B has a required return of 26%. It paid a $1.20 per share dividend last year. 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 have a portfolio made up of 20 percent Company O, 30 percent Company V, and 50 percent Company M, what is your portfolio return? 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. Which of the following is a correct statement about the two stocks? the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … "zero Coupon Bonds" Quizlet - 06/2020. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. What was the market risk premium during that year? If you owned 400 shares of FedEx, what was your percent return? All of these are investor diversification problems. Government Treasury bonds are historically considered the safest bonds. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. What will be the change in the bond's price in percentage terms? FedEx Corp. stock ended the previous year at $118.30 per share. It is expected to pay its first dividend of $0.10 per share in three years. Calculate the security's equilibrium rate of return. Expected Return. What is the standard deviation of monthly returns? Calculate the bond's default risk premium. A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Which of the following is the correct ranking from least risky to most risky? Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. FedEx Corp. stock ended the previous year at $136.20 per share. In return for this safety, the bonds return the lowest interest rate. 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. Hence, the outcome is not guaranteed. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. Actual Return: An actual return is the actual gain or loss of an investor. FedEx Corp. stock ended the previous year at $118.30 per share. (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. A fast growing firm recently paid a dividend of $0.50 per share. It paid a $0.80 per share dividend last year at $105.80. the liquidity risk premium on the corporation's bond is 0.50 percent. Compute the value of this stock with a required return of 8 percent. Year-to-date, Company O had earned a 3.50 percent return. If you owned 100 shares of FedEx, what was your percent return? Efficient portfolio is a portfolio that is not dominated by any other portfolio. GEN has 10 million shares outstanding and a stock price of $89.25. Which of the following describes what will occur as you randomly add stocks to your portfolio? U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). Which of the below is the best description of the effect of portfolio diversification? The annual return on the S&P 500 Index was 11.5 percent. What is the beta of your portfolio? If you owned 500 shares of FedEx, what was your percent 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. Round your answer to the nearest whole percent and assume annual coupon payments. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. Which of the following is one of those assumptions? What is the main reason for calculating averages of past returns on stocks? If you owned 100 shares of FedEx, what was your dollar return? Assume a risk free rate of 4.75%. Which of the following is the continual increase in the price level of a basket of goods or services? Which of the debt contracts below would be associated with the biggest interest rate risk? 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. The current bond price will increase and interest rates on new bonds will decrease. The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. A) 13% A portfolio manager is managing a $10 million portfolio. Currently, GLE, is trading in the market for $51. It has had a credit rating of BB and a yield to maturity of 6.25 percent. Which of the following is a correct statement about the two stocks? If you owned 500 shares of FedEx, what was your dollar return? 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. 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. This implies that. Interest rates, inflation and economic growth are economic factors that are examples of __________________. Stock A has a required return of 19%. 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. ... 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. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Which of the below would be correct? 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 the risk-free rate is 3 percent and the market risk premium is 8 percent, what is the required return for the market? Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. Financial analysts believe the stock will be at their target price of $65.00 in two years. 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%. If the management team of a company decides to increase the dividend payment for the current year. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. Assume that the market is in equilibrium so that expected returns equal required returns. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. 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). 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. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? At face value, the coupon rate and yield equal each other. Year-to-Date, Company O had earned a 2.30 percent return. 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. Given this information which of the following statements is correct? 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. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. They're customizable and designed to help you study and learn more effectively. If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what's the value of the stock? 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. The larger the standard deviation, the higher the total risk. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. 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. True A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on the market is 11%. At the current stock price of $26.07, what is the return shareholders are expecting? When people purchase a stock, they do not know what their return is going to be - either short term or in the long run. The market has an expected rate of return of 12.6 percent. What is the average monthly return? A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. The bond is currently selling at a price below its par value. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. Most common stocks are positively correlated with each other because they are impacted by the same economic factors. Given this information which of the following statements is correct? It ended last year at $145.50. FedEx Corp. ended the previous year at $96.20 per share. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. Stock B has a required return of 8%. Get ready for your Expected Return tests by reviewing key facts, theories, examples, synonyms and definitions with study sets created by students like you. If you owned 400 shares of FedEx, what was your dollar return? It ended last year at $173.90. Which of the following are investor diversification problems? The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. It paid a $0.60 per share dividend last year. The risk premium on an average stock in the market, A stock with beta equal to 2.4 would most likely be considered. Please show all work and formulas. At … A firm does not pay a dividend. During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? 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. 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. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. It ended last year at $145.50. 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. a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. Which of the following is a true statement? (Assume interest payments are paid semi-annually and a par value of $1,000.) Using a 13 percent discount rate, compute the value of this stock. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. 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 … 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. a corporations 10 years bond are currently yielding a return of 7.75 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. The dividend is expected to increase at a 20 percent rate for the next 3 years. 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? 2. You own $1,000 of City Steel stock that has a beta of 1. Which of the following is the reward investors require for taking risk? A particular security's default risk premium is 3 percent, for all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. Treasury bills, long-term Treasury bonds, stocks. You have a portfolio with a beta of 1.25. 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. What would this position on the diagram imply about stock Z? Bondholders have a required rate of return of 12%p.a. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. A company has a beta of 0.75. The wall street journal reports that the current rate of 10 year Treasury bonds is 6.75 percent on 20 year treasury bonds is 7.25 percent and on a 20 year bond is 8.50 percent. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? The market has an expected rate of return of 9.8 percent. The expected return is based on historical data, which may or may not provide reliable forecasting of future returns. Which of the following are the stock of small companies that are priced below $1 per share? It graphs the relationship between beta (β) and expected return, i.e. If you owned 600 shares of FedEx, what was your percent return? (b) The expected return on corporate bonds increases as default risk increases. What is the value of their stock when the required rate of return is 15.13 percent? Which of the following is an electronic stock market without a physical trading floor? Which of these refer to the ease with which an asset can be converted into cash? 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 net increase of only $4. The expected return on Stock A should be greater than that on B. e. The expected return on Stock B should be greater than that on A. The market price of the bond is $910.00. Understand the expected rate of return formula. Which of the following statements is correct? U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. What those outcomes will return common stocks are positively correlated with each other they. 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