SET 2 ANSWERS to PRACTICE QUESTIONS Returns and Bonds Chapters 6-9

CHAPTER 6:

1.d

2.d ([$60 for semiannual coupon + $45 price gain]/1005 = 10.45%)

3.a ($90 interest is offset by $90 loss on sale; therefore zero return)

4.c (10% TR = .10; 1 + .10 = 1.10 return relative)

5.a ([$34 + $1]/$46 = .761)

6.a ([$38 + $1]/40 = .975; this is a TR of -2.5%)

7.a (-.10 + 1.0 = .90)

8.c (divide CWI by CYI; geometric mean of $30.41 is 4.2%; $30.41 = (1.042)83

therefore, dividing CWI by (1.042)83 produces the same answer)

9.a

10.c (this is approximate, but clearly the closest of the answers given)

11.b (always true by definition)

12.a (note that c is reversed—should be (1 + G)2 = (1 + A.M.) 2 etc.)

13.d ($1 x 1.1676 x .98 = $1.1442)

14.a (it is identical to cumulative total return, so d is incorrect)

15.b (remember, no addition or subtraction with CWI)

16.c (multiply these two together to get CWI)

17.c

18.b (RR = [(46+ 2)/50 = .96]; currency adj. = .96; .96 (.96) = .9216 as a RR;

.9216 – 1.0 = -7.84% as a TR)

19.a

20.d (TR = [300 + 10]/250 = 24%); 1.24 x .19/.20 = 17.8%)

CHAPTER 7:

21.a (10% x .2 + 20% x .5 + (-25%) x .3 = 4.5%)

22.b (the two factors are the expected returns for securities and the weights)

23.c (correlation coefficient is not in equation for expected return)

24.c

25.c (1/2 of 10% + 1/2 of 18%)

26.b (choose the stock with the smallest standard deviation because corr. is +1.0)

27.d (total # of terms = n2; 30 x 30 = 900)

28.b (covariance = corr. coeff x std. dev x std. dev; .30 x 12 x 20 = 72)

29.c (covariance = n (n – 1); unique covariances = [n (n -1)] /2)

30.d (market risk would account for most of the risk)

31.a (pick the smallest number)

32.d (the efficient frontier is an arc and contains many portfolios)

33.d (covariance is the important term)

34.b (d is incorrect because proper weights must be chosen to eliminate all risk)

35.c (Markowitz did not deal with systematic risk)

36.a (same reason as #34)

37.d

38.a

39.c (expected return does not directly affect the risk)

40.d (return and risk matter)

41.d (must also supply covariances [or correlations])

42.c

43.b (A and C are opposite ends of the efficient frontier; compare B and D; B has

less return and more risk and therefore is dominated by D)

44.d (remember, a required return is also an expected return)

45.c (7 + 1.1 [16 – 7] = 16.9%)

46.c (beta = 0.8 because the beta for the market is 1.0, and this beta is 80% of the

market beta; k = 6 + .8 [15 – 6] = 13.2%)

47.c (a stock’s risk premium is Βeta X market risk premium; 1.0 X [16 – 7])

48.d (market risk premium is expected market return – RF = 16 – 7)

49.c

50.d

51.b

52.a (inverse relationship; 50% more volatile)

53.a

54.d (large betas are associated with larger expected returns)

CHAPTER 8:

55.c

56.c (remember, it is expected inflation)

57.a

58.b (price and yield move inversely; 1 3/32 = 1.0938%; .010938 x 1000 = $10.938)

59.c (current yield = coupon/bond price; for bonds selling at a discount [<$1,000],

current yield has to be > coupon rate)

60.d (a debenture is an unsecured bond)

61.a (since there are no coupons, there is nothing to reinvest)

62.c

63.b

64.d

65.d (YTM is a promised return)

66.c (intrinsic value is a present value process)

67.c

68.b (not reinvesting the coupons lowers the realized yield)

69.a

70.b

71.a

72.c

73.d (long-term bond prices fluctuate more than do short-term bond prices)

74.c

75.d (YTM has a reinvestment rate assumption, therefore c is incorrect)

76.d (using a calculator, n = 40; PMT = 35; PV = -810; FV = 1000)

77.d (using a calculator, n = 28; PMT = 30; FV = 1000; I/Y = 8%)

78.d (1/24 = .0417; 1000/400 = 2.50; 2.50.0417 – 1.0 = 3.89; 3.89 x 2 = 7.79)

79.a (.09/2 + 1.0 = 1.045; 1.04530 = 3.7453; 1 / 3.7453 = .267; $1000 x .267 = $267)

80.c (coupons; capital gain; interest-on-interest)

81.c

82.d

83.a (coupon is inverse; decreasing rate; weighted average)

84.b (it is the same as the bond’s maturity)

85.d

86.b (-8 x .0075 = -.06 or -6%)

87.c

CHAPTER 9:

88.b

89.c (term structure is static because it is one point in time)

90.a

91.c (this is dealt with in the term structure)

92.c (forward rates are anticipated but unobservable)

93.a

94.c (during boom periods, risk decreases, spreads narrow)

95.b

96.d

97.c (remember, immunization deals with interest rate risk)

98.d

99.a

100.b (the horizon is specified)