Exam 3: Interest Rates and Security Valuation

An investor is considering purchasing a Treasury bond with a 16-year maturity,a 6 percent coupon and a 7 percent required rate of return. The bond pays interest semiannually. A) What is the bond's modified duration? B) If annual promised yields decrease 30 basis points immediately after the purchase,what is the predicted price change in dollars based on the bond's duration?

The interest rate used to find the present value of a financial security is the

Conceptually,why does a bond's price fall when required returns rise on an existing fixed income security?

Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true? I. Bond A has a bigger coupon than Bond B. II. Bond A has a longer duration than Bond B. III. Bond A is less price-volatile than Bond B. IV. Bond B has a higher PV than Bond A.

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Higher interest rates lead to lower bond convexity,ceteris paribus.

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

How does an increase in interest rates affect a security's duration?

A bond that pays interest semiannually has a 6 percent promised yield and a price of $1,045. Annual interest rates are now projected to increase 50 basis points. The bond's duration is five years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

The ________ the coupon and the ________ the maturity; the ________ the duration of a bond,ceteris paribus.

A security has an expected return less than its required return. This security is

The duration of a 91-day T-Bill is (in years).

The duration of a four-year maturity 10 percent coupon bond is less than four years.

Duration is

A preferred stock is expected to pay a constant quarterly dividend of $1.25 per quarter into the future. The required rate of return,Rs,on the preferred stock is 13.5 percent. What is the fair value (or price)of this stock?

The preferred stock of ACE pays a constant $1.00 per share dividend. The common stock of ACME just paid a $1.00 dividend per share,but its dividend is expected to grow at 4 percent per year forever. ABLE common stock also just paid a dividend of $1.00 per share,but its dividend is expected to grow at 10 percent per year for five years and then grow at 4 percent per year forever. All three stocks have a 12 percent required return. How much should you be willing to pay for a share of each stock? Which stock will give you the best return? Explain.

The longer the time to maturity,the lower the security's price sensitivity to an interest rate change,ceteris paribus.