A fast growing firm recently paid a dividend of $0.50 per share. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. Calculate the maturity risk premium on the two-year Treasury security. Once you have completed the test, … Master key terms, facts, and definitions before your next test with the latest study sets in the Expected Return category. Which of the below is the best description of the effect of portfolio diversification? compounded semi-annually. Expected Return. Which of these investors earn returns from receiving dividends and from stock price appreciation? Also assume inflation rate of 3%. 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 has had a credit rating of BB and a yield to maturity of 6.25 percent. This dividend will grow at 11 percent indefinitely. 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. Which of the following is a concern regarding beta? Please show all work and formulas. What should be YTM for the bond? Most common stocks are positively correlated with each other because they are impacted by the same economic factors. Triple-A (AAA) rated bonds are those deemed least likely to default. During the same period, Company V earned 1.70 percent and Company M earned -1.20 percent. 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? Ex… A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. Bondholders have a required rate of return of 12%p.a. 23. Which of these is the term for portfolios with the highest return possible for each risk level? This can be expressed in the following formula: expected return (ex-ante) … FedEx Corp. stock ended the previous year at $136.20 per share. Firms can quite possibly change their stocks' risk level by substantially changing their business. The new appropriate discount rate will be 6.00 percent. It paid a $0.80 per share dividend last year at $105.80. Which of the debt contracts below would be associated with the biggest interest rate risk? The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? The inflation rate is … What is the average monthly return? Stock A has a required return of 19%. It paid a $0.60 per share dividend last year. Expected return The expected return on a risky asset, given a probability distribution for the possible rates of return. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? FedEx Corp. stock ended the previous year at $118.30 per share. 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. Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. Stock B has a required return of 26%. U.S. Stocks – S&P 500: 8.2%International – MSCI EAFE: 4.4%U.S. Which of the following describes what will occur as you randomly add stocks to your portfolio? 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. Assume you borrow 100 apples and in 1 year you return 107 apples. What yield to maturity is the bond offering? An efficient portfolio, also known as an ‘optimal portfolio’, is one that provides that best expected return on a given level of risk, or alternatively, the minimum risk for a given expected return.A portfolio is a spread of investment products.. "zero Coupon Bonds" Quizlet - 06/2020. Treasury bills, long-term Treasury bonds, stocks. JIM corporate bond with yield of 12.25 percent, IB corporate bond with yield of 4.49 percent. If you owned 400 shares of FedEx, what was your percent return? What will be the change in the bond's price in dollars? Which of the following statements is correct regarding diversification? Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? As mentioned in the section above, a Sharpe ratio of … (Assume semi-annual interest payments and $1,000 par value.). If a 13 percent discount rate is appropriate for this stock, what is its value? Company X has a beta of 1.45. 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. Stock B has a required return of 8%. Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. (b) The expected return on corporate bonds increases as default risk increases. 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. Consider a portfolio comprised of four securities in the following proportions and with the indicated security beta. 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 these refer to the ease with which an asset can be converted into cash? What would this position on the diagram imply about stock Z? It also claims that this stock is a "safe bet" for the future. At face value, the coupon rate and yield equal each other. Assume a risk free rate of 4.75%. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. CODES (2 months ago) 11 new "zero Coupon Bonds" Quizlet results have been found in the last 90 days, which means that every 8, a new "zero Coupon Bonds" Quizlet result is figured out. If you owned 100 shares of FedEx, what was your dollar return? All of these statements are valid concerns regarding beta. All of these are investor diversification problems. What is the change in price the bond will experience in dollars? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". 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). Year-to-Date, Company O had earned a 2.30 percent return. What will be the change in the bond's price in percentage terms? Cash flows for an investment for today, next year and the year after are forecast to be $4000, $5000 and $6600. The past four monthly returns for K and Company are 3.40 percent, 2.30 percent, 0.80 percent, and -0.70 percent. The real rate of interest on the loan is equal to 4%. A stock with beta equal to 1 would most likely be considered, to be of about the same risk as the overall stock market, Shares of stock issued to employees that have limitations on when they can be sold are known as. The market has an expected rate of return of 9.8 percent. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. Financial analysts forecast Best Buy Company (BBY) growth fro the future to be 13 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. If you owned 500 shares of FedEx, what was your dollar return? The new appropriate discount rate will be 9 percent. True A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on the market is 11%. Year-to-date, Company O had earned a 3.60 percent return. 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. ... 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. Assume interest payments are paid semi-annually and par value is $1,000. a) Your portfolio is invested 40 per cent each in A and C, and 20 per cent in B. 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. 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. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. Currently, GLE, is trading in the market for $51. 2. 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%. It paid a $0.60 per share dividend last year. The Vanguard fund had both a higher average annual return for the period and a lower standard deviation. Compute the value of this stock with a required return of 8 percent. FedEx Corp. stock ended the previous year at $118.30 per share. 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. 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 formula is the following. the liquidity risk premium on the corporation's bond is 0.50 percent. Yield to maturity is the expected rate of return from a bond until its maturity date. Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. The holding period return yield formula may be used to compare the yields of different bonds in your portfolio over a given time period. 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. 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. Which of these is a theory that describes the types of information that are reflected in current stock prices? Calculate the bond's default risk premium. Like many formulas, the expected rate of return formula requires a few "givens" in order to solve for the answer. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk? What is the main reason for calculating averages of past returns on stocks? b-1) What is the variance of this portfolio? 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 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. Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. Currently, the risk-free rate is 5 percent and the portfolio has an expected return of 10 percent. Understand the expected rate of return formula. Chapter 2: Bonds, stocks and other securities Try the multiple choice questions below to test your knowledge of this chapter. it shows expected return as a function of β. 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. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. 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. the liquidity risk premium on the corporation's bond is 0.50 percent. Round your answer to the nearest whole percent and assume annual coupon payments. We think they will be useful in estimating future expected return. If the management team of a company decides to increase the dividend payment for the current year. A) 13% FedEx Corp. stock ended the previous year at $136.20 per share. Assume that the market is in equilibrium so that expected returns equal required returns. what is the default risk premium on the corporation's 10 year bonds? Discover free flashcards, games, and test prep activities designed to help you learn about Expected Return and other concepts. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. If you owned 100 shares of FedEx, what was your percent return? A manager believes his firm will earn a 12 percent return next year. Using the CAPM, what is ABC’s expected return? (a) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. 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. Bond-rating agencies take into account a company's balance sheet and many other factors. Stock A has a required return of 15%. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. It ended last year at $173.90. This is an example of a market overreaction. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. Answer: You should buy the bond since the actual price of the bond is lower than the price with your required rate. a corporations 10 years bond are currently yielding a return of 7.75 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. Which of the following statements is correct? 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? Get ready for your Expected Return tests by reviewing key facts, theories, examples, synonyms and definitions with study sets created by students like you. By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios. A firm does not pay a dividend. Assume a risk free rate of 4.75%. the expected return on default-free bonds. Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to. the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year … The expected return is the amount of profit or loss an investor can anticipate receiving on an investment. What is the beta of your portfolio? At the current stock price of $26.07, what is the return shareholders are expecting? This is an example of a market underreaction. Name the dominated portfolio and the portfolio that dominates it. The security's liquidity risk premium is .35 percent and maturity risk premium is .95 percent. Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. Which of the below would be correct? In return for this safety, the bonds return the lowest interest rate. The expected rate of return is the return on investment that an investor anticipates receiving. Hence, the outcome is not guaranteed. It paid a $1.20 per share dividend last year. 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. 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. You believe that in one year, the yield to maturity will be 6.25 percent. (Assume interest payments are paid semi-annually and a par value of $1,000.) a corporations 10 years bond are currently yielding a return of 7.75 percent. Efficient portfolio is a portfolio that is not dominated by any other portfolio. A company has a beta of 0.75. Which of the following are the stock of small companies that are priced below $1 per share? The annual return on the S&P 500 Index was 11.5 percent. 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%. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. 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. 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. Which of the following is a true statement? You own $1,000 of City Steel stock that has a beta of 1. It paid a $1.30 per share dividend last year. The market price of the bond is $910.00. FedEx Corp. ended the previous year at $96.20 per share. The expected risk-free rate of interest is 2.5% and the expected return on the market as a whole is 10%. A two-year Treasury security currently earns 5.13 percent. It graphs the relationship between beta (β) and expected return, i.e. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, -0.60 percent, and 1.20 percent. Financial analysts believe the stock will be at their target price of $65.00 in two years. Which of the following is the model that includes an equation that relates a stock's required return to an appropriate risk premium? A corporate bond with a 5 percent coupon has 10 years left to maturity. 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. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. b. Government Treasury bonds are historically considered the safest bonds. Portfolio Blue dominates Portfolio Purple, Which of these is defined as a combination of investment assets held by an investor. 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 … there is typically not much trading activity related to the security, the rate that a security would pay if no inflation were expected over its holding period, Assume the interest rate demanded on a bond issued by Ford is 7%. 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. 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? Which of the following is the asset pricing theory based on a beta, a measure of market risk? Using a 13 percent discount rate, compute the value of this stock. Which of the following statements is correct regarding this information? 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. Which of the following is the correct ranking from least risky to most risky? Which of the following is the reward investors require for taking risk? The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). 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. The current bond price will increase and interest rates on new bonds will decrease. 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. What is the average monthly return? Determine which one of these three portfolios dominates another. Which of the following is an electronic stock market without a physical trading floor? What is the expected return of the portfolio? Year-to-date, Company O had earned a 3.50 percent return. Sally has researched GLE and wants to pay no more than $50 for the stock. 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… The annual T-bill yield during the same period was 4.3 percent. Which of the bonds below would be most liquid? Answer: B Question Status: Previous Edition 35) Which of the following statements are true? 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. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06 percent. Rank the following three stocks by their level of total risk, highest to lowest. The dividend is expected to grow at a 14.5 percent rate. 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? 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. 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. It paid a $1.30 per share dividend last year. Which of the following is a correct statement about the two stocks? taught by Chao Jiang at the University of Kansas. The security has no special covenants. What is the average monthly return? They're customizable and designed to help you study and learn more effectively. 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 is one of those assumptions? Risk is reduced without necessarily reducing the expected return. The expected return and risk of Portfolio Yellow are 15 percent and 19 percent, and for the Purple Portfolio are 12 percent and 18 percent. What would this position on the diagram imply about stock Z? The dividend is expected to increase at a 20 percent rate for the next 3 years. Which of the following will only be executed if the order's price conditions are met? A bond's yield is more accurately thought of as the effective rate of return based on the actual market value of the bond. Their recent dividend was $.69. Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. What is the standard deviation of monthly returns? The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent. Interest rates, inflation and economic growth are economic factors that are examples of __________________. Small Cap – Dimensional US Small Cap Index: 11.5%Bonds – Barclays US Aggregate Bond Index: 5.3%. GEN has 10 million shares outstanding and a stock price of $89.25. The larger the standard deviation, the higher the total risk. FedEx Corp. stock ended the previous year with $165.30 per share. However, the YTM equals the expected rate of return under certain assumptions. A corporate bond with a 5.75 percent coupon has 15 years left to maturity. Which of the following are investor diversification problems? Given this information which of the following statements is correct? 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. Given this information which of the following statements is correct? American Eagle Outfitters (AEO) recently paid a $0.38 dividend. r = 2.5% + 1.45(10% - 2.5%) = 13.375% 3. 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 12.6 percent. During the same time period, Company V earned 1.90 percent and Company M earned -3.60 percent. The security has no special covenants. 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. A bond issued by the United States government, common stock issued by a small but financially strong firm. 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. 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