Exam 9: Properties and Pricing of Financial Assets

Suppose the cash flows for a financial asset's payment for years 1 through 4 are $100. That is, CFt = $100 for t (t = 1, ... ,4). Further assume the the discount rate is 8.00% and at the end of four years that the financial asset will pay $1,000 in addition to the $100. Finally, assume a broker's commission of $30 is imposed by brokers to buy or sell the bond. To the nearest dollar, what is the correct price for this financial asset?

Which of the below statements is TRUE?

Which of the below is NOT one of the eleven properties of financial assets?

Assume the price of a coupon bond is $650. Further assume that if the yield is increased by 50 basis points, then the price would be $620 and if the yield is decreased by 50 basis points, then the price would be $700. What is the duration?

Although we use a single discount rate to discount each cash flow, there are theoretical reasons that suggest this is ________.

An asset's maturity is a factor that affects its price sensitivity to a change in yield. In fact, a bond's price sensitivity to a change in the discount rate is positively related to the bond's maturity. Consider the case of two bonds that have the same coupon rate, and the same required yield but different maturities. If the required rate were to change, the price sensitivity of the bond with the longer maturity would be greater than that of the bond with the shorter maturity. Give an illustration of this.

Suppose the cash flows for a financial asset's payment for years 1 through 5 are $90. That is, CFt = $90 for t (t = 1, ... ,5). Further assume the the discount rate is 7.00% and at the end of the five years that the financial asset will pay back $1,000 in addition to the $90. Finally, assume a broker's commission of $40 is imposed by brokers to buy or sell the financial asset and that a government entity imposes a transfer tax of $25 on each transaction. To the nearest dollar, what is the correct price for this financial asset?

The fundamental principle of finance is that the true or correct price of an asset equals the ________ of all cash flows that the owner of the asset expects to receive during its life.

Explain the difference between modified duration and effective duration. In your also give an example of when the difference can be dramatic.

The conversion privilege of a convertible bond is not valued by the market.

The correct price for a financial asset can be expressed as follows: $P=\frac{C F_{1}}{(1+r)^{1}}+\frac{C F_{2}}{(1+r)^{2}}+\frac{C F_{3}}{(1+r)^{3}}+\frac{C F_{N}}{(1+r)^{N}} \text { where }$ _________

For financial assets traded with market makers, the most relevant component of round-trip cost is the bid-ask spread. The spread charged by a market maker varies sharply from one financial asset to another, reflecting primarily the amount of risk the market maker is assuming by "making" a market. This market-making risk can be related to two main forces. Describe these two forces or determinants of this risk.

Reversibility is referred to as ________.

A ________ asset is one that provides options for the issuer or the investor, or both, and so represents a combination of simpler assets.

Suppose that the required yield on a 6% coupon, 12-year bond increases from 10% to 11% (0.01 in decimal form). If this bond's duration is 8.96, what is the approximate percentage change in price?

Approximate percentage change in a financial asset's price equals what?

Factors that influence an asset's price sensitivity include its maturity, its coupon rate, and the initial level of the required yield.

Suppose that a bond is granted a favorable tax treatment such that the interest and any capital gain from this bond would not be taxed. Suppose that the marginal tax rate on otherwise equivalent taxable bonds is 25% and the appropriate discount rate is 7%. What is the after-tax discount rate?

Some properties are intrinsic to the asset, such as its maturity or promised cash flow.

The return that an investor will realize by holding a financial asset depends on all the ________ that the financial asset will pay its owners; this includes dividends on shares and coupon payments on bonds.