Exam2%20-%20Study%20Guide - Name: ________________________...

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Unformatted text preview: Name: ________________________ Class: ___________________ Date: __________ ID: A 1 Study Guide - Exam 2 True/False Indicate whether the statement is true or false. ____ 1. The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds. ____ 2. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity. ____ 3. As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured. ____ 4. Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds. ____ 5. You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF. ____ 6. Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds. ____ 7. In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data. ____ 8. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. ____ 9. If investors become less averse to risk, the slope of the Security Market Line (SML) will increase. ____ 10. Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk. ____ 11. The distributions of rates of return for Companies AA and BB are given below: State of the Economy Probability of This State Occurring AA BB Boom 0.2 30%-10% Normal 0.6 10% 5% Recession 0.2-5% 50% We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB. Name: ________________________...
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This note was uploaded on 02/12/2010 for the course ACCOUNT 30624700 taught by Professor Ken during the Spring '10 term at American InterContinental University Illinois.

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Exam2%20-%20Study%20Guide - Name: ________________________...

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