Finance H.W (6 Questions) About Bonds

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Current Yield for Annual Payments

 

1-Heath Foods’ bonds have 6 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 11%. They pay interest annually and have a 7% coupon rate. What is their current yield? Round your answer to two decimal places.

 

 

 

 

Bond Valuation with Semiannual Payments

 

2-Renfro Rentals has issued bonds that have a 6% coupon rate, payable semiannually. The bonds mature in 7 years, have a face value of $1,000, and a yield to maturity of 9.5%. What is the price of the bonds? Round your answer to the nearest cent.

 

 

 

Yield to Maturity and Call with Semiannual Payments

 

3-Thatcher Corporation’s bonds will mature in 18 years. The bonds have a face value of $1,000 and an 8.5% coupon rate, paid semiannually. The price of the bonds is $950. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.

 

What is their yield to maturity?

 

What is their yield to call?

 

 

Yield to Call and Realized Rates of Return

 

4-Six years ago, Goodwynn & Wolf Incorporated sold a 17-year bond issue with a 12% annual coupon rate and a 7% call premium. Today, G&W called the bonds. The bonds originally were sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bonds when they were issued and who surrender them today in exchange for the call price. Round your answer to two decimal places.

 

 

Bond Value as Maturity Approaches

 

5-An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.7%. One bond, Bond C, pays an annual coupon of 11%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.7% over the next 4 years, what will be the price of each of the bonds at the following time periods? Assume time 0 is today. Fill in the following table. Round your answers to the nearest cent

 

t Price of Bond C Price of Bond Z
0 $ $
1    
2    
3    
4    

 

 

 

 

 

Bond Valuation and Changes in Maturity and Required Returns

 

6-Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

 

a.Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 8%. At what price would the bonds sell? Round the answer to the nearest cent

 

b. Suppose that 2 years after the initial offering, the going interest rate had risen to 13%. At what price would the bonds sell? Round the answer to the nearest cent

Arbitrage Pricing Theory And Multifactor Models Of Risk And Return – Chapter 10

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Multiple Choice Questions
1. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has found

 

2. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. CCAPM stipulates
D. APT, CAPM, and CCAPM stipulate
E. No pricing model has found

 

3. In a multi-factor APT model, the coefficients on the macro factors are often called ______.
A. systemic risk
B. factor sensitivities
C. idiosyncratic risk
D. factor betas
E. B and D

6. Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?
A. The CAPM
B. The multifactor APT
C. Both the CAPM and the multifactor APT
D. Neither the CAPM nor the multifactor APT
E. None of the above is a true statement.

7. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.
A. positive
B. negative
C. zero
D. all of the above
E. none of the above

 9. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.
A. factor
B. market
C. index
D. A and B
E. A, B, and C

10. The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________.
A. arbitrage
B. capital asset pricing
C. factoring
D. fundamental analysis
E. none of the above 

11. In developing the APT, Ross assumed that uncertainty in asset returns was a result of
A. a common macroeconomic factor
B. firm-specific factors
C. pricing error
D. neither A nor B
E. both A and B

12. The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.
A. APT, CAPM
B. APT, OPM
C. CAPM, APT
D. CAPM, OPM
E. none of the above

14. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
E. none of the above 

15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-diversified portfolio is approximately __________.
A. 3.6%
B. 6.0%
C. 7.3%
D. 10.1%
E. none of the above

16. Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 18%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately __________.
A. 0.80
B. 1.13
C. 1.25
D. 1.56
E. none of the above

17. Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%, respectively. The risk-free rate of return is 6%. Stock B has a beta of 1.0. If arbitrage opportunities are ruled out, stock A has a beta of __________.
A. 0.67
B. 1.00
C. 1.30
D. 1.69
E. none of the above 

 

18. Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exit?
A. 2%
B. 3%
C. 4%
D. 7.75%
E. none of the above 

19. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
E. none of the above

21. Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%, respectively. Assume that the risk-free rate is 6% and that arbitrage opportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this strategy would be ______________.
A. -$1,000
B. $0
C. $1,000
D. $2,000
E. none of the above

22. Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free rate of return must be ____________.
A. 4.0%
B. 9.0%
C. 14.0%
D. 16.5%
E. none of the above

There are three stocks, A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year; economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

25. If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would be ___________ if economic growth were moderate.
A. 3.0%
B. 14.5%
C. 15.5%
D. 16.0%
E. none of the above

26. If you invested in an equally weighted portfolio of stocks A and C, your portfolio return would be ____________ if economic growth was strong.
A. 17.0%
B. 22.5%
C. 30.0%
D. 30.5%
E. none of the above

 

 

27. If you invested in an equally weighted portfolio of stocks B and C, your portfolio return would be _____________ if economic growth was weak.
A. -2.5%
B. 0.5%
C. 3.0%
D. 11.0%
E. none of the above

28. If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short position in _________ and a long position in an equally weighted portfolio of _______.
A. A, B and C
B. B, A and C
C. C, A and B
D. A and B, C
E. none of the above

 

Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios:

29. Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should be __________.
A. 3%
B. 4%
C. 5%
D. 6%
E. none of the above

 

31. A zero-investment portfolio with a positive expected return arises when _________.
A. an investor has downside risk only
B. the law of prices is not violated
C. the opportunity set is not tangent to the capital allocation line
D. a risk-free arbitrage opportunity exists
E. none of the above 

 

32. An investor will take as large a position as possible when an equilibrium price relationship is violated. This is an example of _________.
A. a dominance argument
B. the mean-variance efficiency frontier
C. a risk-free arbitrage
D. the capital asset pricing model
E. none of the above 

 

33. The APT differs from the CAPM because the APT _________.
A. places more emphasis on market risk
B. minimizes the importance of diversification
C. recognizes multiple unsystematic risk factors
D. recognizes multiple systematic risk factors
E. none of the above

34. The feature of the APT that offers the greatest potential advantage over the CAPM is the ______________.
A. use of several factors instead of a single market index to explain the risk-return relationship
B. identification of anticipated changes in production, inflation and term structure as key factors in explaining the risk-return relationship
C. superior measurement of the risk-free rate of return over historical time periods
D. variability of coefficients of sensitivity to the APT factors for a given asset over time
E. none of the above

35. In terms of the risk/return relationship
A. only factor risk commands a risk premium in market equilibrium.
B. only systematic risk is related to expected returns.
C. only nonsystematic risk is related to expected returns.
D. A and B.
E. A and C.

36. The following factors might affect stock returns:
A. the business cycle.
B. interest rate fluctuations.
C. inflation rates.
D. all of the above.
E. none of the above

 

 

38. Portfolio A has expected return of 10% and standard deviation of 19%. Portfolio B has expected return of 12% and standard deviation of 17%. Rational investors will
A. Borrow at the risk free rate and buy A.
B. Sell A short and buy B.
C. Sell B short and buy A.
D. Borrow at the risk free rate and buy B.
E. Lend at the risk free rate and buy B.

 

39. An important difference between CAPM and APT is
A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition.
B. CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium.
C. implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments.
D. all of the above are true.
E. both A and B are true.

 

40. A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A. pure arbitrage.
B. risk arbitrage.
C. option arbitrage.
D. equilibrium arbitrage.
E. none of the above.

 

41. In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger its nonsystematic risk approaches
A. one.
B. infinity.
C. zero.
D. negative one.
E. none of the above.

 

42. A well-diversified portfolio is defined as
A. one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero.
B. one that contains securities from at least three different industry sectors.
C. a portfolio whose factor beta equals 1.0.
D. a portfolio that is equally weighted.
E. all of the above. 

 

43. The APT requires a benchmark portfolio
A. that is equal to the true market portfolio.
B. that contains all securities in proportion to their market values.
C. that need not be well-diversified.
D. that is well-diversified and lies on the SML.
E. that is unobservable.

44. Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements?
I) the expected return-beta relationship is maintained for all but a small number of well-diversified portfolios.
II) the expected return-beta relationship is maintained for all well-diversified portfolios.
III) the expected return-beta relationship is maintained for all but a small number of individual securities.
IV) the expected return-beta relationship is maintained for all individual securities.

46. The term “arbitrage” refers to
A. buying low and selling high.
B. short selling high and buying low.
C. earning risk-free economic profits.
D. negotiating for favorable brokerage fees.
E. hedging your portfolio through the use of options.

 

47. To take advantage of an arbitrage opportunity, an investor would
I) construct a zero investment portfolio that will yield a sure profit.
II) construct a zero beta investment portfolio that will yield a sure profit.
III) make simultaneous trades in two markets without any net investment.
IV) short sell the asset in the low-priced market and buy it in the high-priced market.

 

48. The factor F in the APT model represents
A. firm-specific risk.
B. the sensitivity of the firm to that factor.
C. a factor that affects all security returns.
D. the deviation from its expected value of a factor that affects all security returns.
E. a random amount of return attributable to firm events.

49. In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of s(ei) equal to 25% and 50 securities?
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 14.59% 

 

 

53. Which of the following is true about the security market line (SML) derived from the APT?
A. The SML has a downward slope.
B. The SML for the APT shows expected return in relation to portfolio standard deviation.
C. The SML for the APT has an intercept equal to the expected return on the market portfolio.
D. The benchmark portfolio for the SML may be any well-diversified portfolio.
E. The SML is not relevant for the APT.

54. Which of the following is false about the security market line (SML) derived from the APT?
A. The SML has a downward slope.
B. The SML for the APT shows expected return in relation to portfolio standard deviation.
C. The SML for the APT has an intercept equal to the expected return on the market portfolio.
D. The benchmark portfolio for the SML may be any well-diversified portfolio.
E. A, B, and C are false.

 

55. If arbitrage opportunities are to be ruled out, each well-diversified portfolio’s expected excess return must be
A. inversely proportional to the risk-free rate.
B. inversely proportional to its standard deviation.
C. proportional to its weight in the market portfolio.
D. proportional to its standard deviation.
E. proportional to its beta coefficient.

 

56. Suppose you are working with two factor portfolios, Portfolio 1 and Portfolio 2. The portfolios have expected returns of 15% and 6%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%.
A. 15.2%
B. 14.1%
C. 13.3%
D. 10.7%
E. 8.4% 

 

58. In a factor model, the return on a stock in a particular period will be related to
A. factor risk.
B. non-factor risk.
C. standard deviation of returns.
D. both A and B are true.
E. none of the above are true.

59. Which of the following factors did Chen, Roll and Ross not include in their multifactor model?
A. Change in industrial production
B. Change in expected inflation
C. Change in unanticipated inflation
D. Excess return of long-term government bonds over T-bills
E. All of the above factors were included in their model.

61. Which of the following factors were used by Fama and French in their multi-factor model?
A. Return on the market index
B. Excess return of small stocks over large stocks.
C. Excess return of high book-to-market stocks over low book-to-market stocks.
D. All of the above factors were included in their model.
E. None of the above factors were included in their model. 

63. Which of the following factors did Merton suggest as a likely source of uncertainty that might affect security returns?
A. uncertainties in labor income.
B. prices of important consumption goods.
C. book-to-market ratios.
D. changes in future investment opportunities.
E. A, B, and D.

64. Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because ________.
A. they may result from data snooping.
B. they are sources of systematic risk.
C. they can be explained by security characteristic lines.
D. they are more appropriate for a single-factor model.
E. they are macroeconomic factors.

65. Multifactor models seek to improve the performance of the single-index model by
A. modeling the systematic component of firm returns in greater detail.
B. incorporating firm-specific components into the pricing model.
C. allowing for multiple economic factors to have differential effects
D. all of the above are true.
E. none of the above are true.

66. Multifactor models such as the one constructed by Chen, Roll, and Ross, can better describe assets’ returns by
A. expanding beyond one factor to represent sources of systematic risk.
B. using variables that are easier to forecast ex ante.
C. calculating beta coefficients by an alternative method.
D. using only stocks with relatively stable returns.
E. ignoring firm-specific risk.

Executive Business Simulation

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LBPG5009 Simulation Referral Assignment 2017/18

The referral assignment (to be completed as individuals and not groups) has TWO parts (A and B) and you MUST complete both parts

Part A

“Reflection helps us learn how and why we have changed as a result of our learning. It can help our critical thinking skills and help us make connections between what we learn in school and what we see in the world and learn in our everyday lives.” (http://metroacademies.myefolio.com/efolio/reflect, accessed 19.03.13)

You are required to provide an individual reflection on the Group Simulation Exercise undertaken in Semester One.

Your individual reflective statement should consider four areas as detailed below.

Critically analyse the following:

1. How your team performed as a car company, and the successes or pitfalls of the decisions you made; (Should you have failed due to not contributing effectively to a group then you need to explain how you, personally could have made a more informed contribution).

2. The link between theories analysed on your programme, and the tasks undertaken during the Simulation Exercise;

3. How you and your group performed as a team, in terms of undertaking the assignment brief;

4. How the whole learning experience has contributed to and enhanced your learning going forwards.

You are required to produce a reflective statement in a typed report format, of no more than 1,000 words. It is suggested that the word count is split equally between the four areas. You must adopt the Harvard style of referencing where appropriate.

Part B

Campbell and Inagaki (2016) stated , “Some car industry executives have expressed concerns that if the UK struggles to retain good access to the EU single market after Brexit, then British car plants risk becoming uncompetitive, leading to lost work on refreshed models and, in time, possible closure.”

You are required to prepare a well-balanced discussion of the issue highlighted by Campbell and Inagaki (2016). You should refer to multiple sources and ensure that you follow Harvard Referencing protocol.

Part B should also be of no more than 1,000 words.

Campbell, P. and Inagaki, K. (2106), “UK car companies face an uncertain future after Brexit,” FT. Com, London, 13th July (accessed 15/03/18)

Submissions to Turnitin must be made by 11.59 p.m. on 26th April

Note that you are also required to submit a physical copy to the SAC by 1.30 p.m. on 27th April.

1

Calculate an appropriate measure of association

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Running head: QUESTION 18.5 RESPONSE 1

QUESTION 18.5 RESPONSE 6

 

A research team conducted a study of soft-drink preferences among residents in a test market prior to an advertising campaign for a new cola product. Of the participants, 130 are teenagers and 130 are adults. The researchers secured the following results:

Cola Noncola

Teenagers 50 80

Adults 90 40

Calculate an appropriate measure of association, and decide how to present the results. How might this information affect the advertising strategy?

The first factor to consider would be to determine the null hypothesis (actual age of the consumer and soft drink preference). The null hypothesis: H0= There is no relationship between the soft-drink preference and the age of the consumer.

The statistical test:

Critical values of Chi-Square

http://www.stat.yale.edu/Courses/1997-98/101/chisq.gif

Figure 1. Chi-Square formula. Retrieved from http://www.stat.yale.edu/Courses/1997- 98/101/chisq.htm

(Formulas taken from pages 490 and 491, Cooper and Schindler, 2014)

a= 0.05

d.f. (degrees of freedom) = 1

χ2 critical value = 3.841

Chi-Square Test: Cola, Non-Cola

Expected counts are printed below observed counts

Chi-Square contributions are printed below expected counts

Cola Non-Cola Total

Teens 50 80 130

70.00 60.00

5.714 6.667

Adults 90 40 130

70.00 60.00

5.714 6.667

Total 140 120 260

Chi-Sq = 24.762, DF = 1, P-Value = 0.000

Interpreting the test

The calculated chi-square value of 24.762 is larger than the critical value of 3.841 which means the null hypothesis (H) must be rejected. The alternative hypothesis does not specify the type of association, so close attention to the data is required to interpret the information provided by the test. The alternative hypothesis (Ha) is accepted, there is a relationship between the soft-drink preference and the age (teenage and adult, exact age not considered) of the consumer.

The distribution of the statistic X2 is  chi-square  with (r-1)(c-1) degrees of freedom, where r represents the number of rows in the two-way table and c represents the number of columns. The distribution is denoted http://www.stat.yale.edu/Courses/1997-98/101/chi.gif(df), where df is the number of degrees of freedom.

The chi-square distribution is defined for all positive values. The P-value for the chi-square test is P (http://www.stat.yale.edu/Courses/1997-98/101/chi.gif >X²), the probability of observing a value at least as extreme as the test statistic for a chi-square distribution with (r-1)(c-1) degrees of freedom (Anonymous, 2018).

According to Lani (2018), “There are a number of important considerations when using the Chi-Square statistic to evaluate a cross-tabulation”.  When Chi-Square value is calculated, “it is extremely sensitive to sample size – when the sample size is too large (~500), any small difference will appear statistically significant” (Lani, 2018).  The total sample size is within range (260); therefore, differences in calculations are negligible.

Presenting the results

The proper technique for associating this study is chi-square because we are

comparing two binary variables (one is teenagers or adults and the other is no cola or cola).

Adults prefer cola over no cola products (chi-square, p< .001), and teenagers prefer non-cola over cola products. This information may be useful in the advertisement strategy by proposing that promotional campaigns of cola products should focus more on adult individuals rather than teenagers. The chi-square test is applied in a two way table having one or two variables. In chi-square test the count in every cell is compared to the expected count as supposition of having no association between a table’s rows and columns.

“There is no all -round technique for explicit data. Some get severely affected by shape and number of cells; while others are sensitive to sample size or marginal,” (Schindler & Cooper, 2011, p. 515). The results demonstrate that adults consume more cola than teenagers. Marketing relies on the companies producing non-cola or cola products. It is also an important factor to know if the cola company is trying to keep their current customers, or focusing their marketing strategies for new younger customers to their products. The key is based on demographics. Only 130 of each group was surveyed, but if the company were to determine the total number of teenagers to adults, the figures would probably conclude that there are more teenagers than adults. Proverbs 24:14 states, “So [shall] the knowledge of wisdom [be] unto thy soul: when thou hast found [it], then there shall be a reward, and thy expectation shall not be cut off”. What is God trying to covey in this message; simply put, there can be numerous connotations. The expectations may be great, but knowledge and wisdom are food for the soul. The research team probably assumed teenagers were more likely to consume cola beverages, but data clearly indicated adults consume more cola beverages overall.

 

 

 

 

 

Reference

Anonymous (2018). Two-way tables and the chi-square test. Retrieved from http://www.stat.yale.edu/Courses/1997-98/101/chisq.htm

Cooper, D. R., & Schindler, P. S. (2014). Business research methods (12th ed.). New York, NY: McGraw-Hill. ISBN 9780073521503.

Lani, J. (2018). Using chi-square statistic in research. Retrieved from http://www.statisticssolutions.com/using-chi-square-statistic-in-research/