Can you explain intuitively why the interest-rate riskis positively associated with maturity but negatively associatedwith coupon rate of the debt instrument that you hold?
How does the interest-rate risk vary with the level ofinterest rates? For example, during the recession when marketinterest rates are low, does the overall level of interest-raterisk become higher or lower?
Imagine that youâre managing a portfolio of long- andshort-term bonds. If you predict a rise in interest rates, howwould you adjust your portfolio composition?
And how would you adjust your portfolio if you predicta fall in interest rates?
What is the relationship between interest rates andstock market?
How would you compare the degree of interest-rate riskand reinvestment risk between floating rate (variable rate oradjustable rate) bonds and fixed rate bonds? Floating ratebonds are bonds whose coupon payments are adjusted periodicallyaccording to market interest rates.
Can you explain intuitively how a bond laddermitigates interest-rate risk and reinvestment risk?
Can you explain intuitively why the interest-rate riskis positively associated with maturity but negatively associatedwith coupon rate of the debt instrument that you hold?
How does the interest-rate risk vary with the level ofinterest rates? For example, during the recession when marketinterest rates are low, does the overall level of interest-raterisk become higher or lower?
Imagine that youâre managing a portfolio of long- andshort-term bonds. If you predict a rise in interest rates, howwould you adjust your portfolio composition?
And how would you adjust your portfolio if you predicta fall in interest rates?
What is the relationship between interest rates andstock market?
How would you compare the degree of interest-rate riskand reinvestment risk between floating rate (variable rate oradjustable rate) bonds and fixed rate bonds? Floating ratebonds are bonds whose coupon payments are adjusted periodicallyaccording to market interest rates.
Can you explain intuitively how a bond laddermitigates interest-rate risk and reinvestment risk?
Related questions
Question 18
1. Which of the following does an efficient portfolio do?
1. Maximizes risk for a given return.
2. Minimizes risk for a given return.
3. Maximizes return for a given level of risk.
4. Minimizes return for a given level of risk.
| a. | 1 and 3. | |
| b. | 1 and 4. | |
| c. | 2 and 3. | |
| d. | 2 and 4. |
3 points
Question 19
1. The security market line does not:
| a. | Indicate the relationship between risk and return. | |
| b. | Relate the market return and beta to a stock's return. | |
| c. | Identify the optimal portfolio for the investor. | |
| d. | Use beta coefficients as a measure of risk. |
3 points
Question 20
1. Mutual funds ____ realized capital gains and income (for example, dividends received):
| a. | Retain. | |
| b. | Reinvest. | |
| c. | Distribute. | |
| d. | Distribute or reinvest. |
2 points
Question 21
1. An index fund limits its portfolio to:
| a. | High quality securities. | |
| b. | Stocks that respond to changes in the consumer price index. | |
| c. | Stocks included in an aggregate measure of stock prices. | |
| d. | Stocks of firms in a particular industry. |
2 points
Question 22
1. Mutual funds with beta coefficients greater than 1.0:
| a. | Have outperformed the market. | |
| b. | Have underperformed the market. | |
| c. | Have more systematic risk than the market. | |
| d. | Have less systematic risk than the market. |
3 points
Question 23
1. Which of the following will tend to cause a stock's price to fall?
1. The firms beta declines.
2. The firms beta increases.
3. The risk-free rate declines.
4. The risk-free rate increases.
| a. | 1 and 3. | |
| b. | 1 and 4. | |
| c. | 2 and 3. | |
| d. | 2 and 4. |
2 points
Question 24
1. The use of P/E ratios to select stocks suggests that:
| a. | High P/E stocks should be purchased. | |
| b. | Low P/E ratio stocks are overvalued. | |
| c. | A stock should be purchased if it is selling near its historic low P/E. | |
| d. | A stock should be purchased if it is selling near its historic high P/E. |
2 points
Question 25
1. What does the efficient market hypothesis require?
1. Financial markets to be competitive.
2. Prices to adjust rapidly.
3. Prices of undervalued securities to fall.
| a. | 1 and 2. | |
| b. | 1 and 3. | |
| c. | 2 and 3. | |
| d. | All of these choices. |
3 points
Question 26
1. Which of the following does the strong form of the efficient market hypothesis suggest?
1. Inside information will not lead to superior investment results.
2. Inside information will lead to superior investment results.
3. Studying financial statements will not lead to superior investment results.
4. Studying financial statements will lead to superior investment results.
| a. | 1 and 3. | |
| b. | 1 and 4. | |
| c. | 2 and 3. | |
| d. | 2 and 4. |
3 points
Question 27
1. Which of the following is the least broad-based measure of stock prices?
| a. | NASDAQ market index. | |
| b. | Dow Jones industrial average. | |
| c. | S&P 500 stock index. | |
| d. | AMEX market value index. |
3 points
Question 28
1. What is dollar-cost averaging?
| a. | Periodically buying a round lot of stock. | |
| b. | Periodically investing a specified dollar amount in a stock. | |
| c. | A means to increase the average cost basis. | |
| d. | A means to ensure a positive return. |
2 points
Question 29
1. Stock dividends cause:
| a. | The price of a share of stock to rise. | |
| b. | The price of a share of stock to fall. | |
| c. | The value of the firm to rise. | |
| d. | The value of the firm to fall. |
2 points
Question 30
1. Which of the following occurs when a stock has a two-for-one split?
| a. | The price of the stock doubles. | |
| b. | The firm's assets increase. | |
| c. | The firm's liabilities decrease. | |
| d. | The par value of the stock is reduced. |
3 points
Question 31
1. Dividend reinvestment plans offer which of the following advantages?
1. Deferment of federal income taxes.
2. A convenient means to accumulate shares.
3. Dollar-cost averaging.
| a. | 1 and 2. | |
| b. | 1 and 3. | |
| c. | 2 and 3. | |
| d. | 2. |
3 points
Question 32
1. When the Federal Reserve seeks to expand the money supply, it:
| a. | Sells securities. | |
| b. | Buy securities. | |
| c. | Runs a deficit. | |
| d. | Runs a surplus. |
2 points
Question 33
1. The sum of cash, currency, and demand deposits is:
| a. | M1. | |
| b. | M2. | |
| c. | M3. | |
| d. | M4. |
3 points
Question 34
1. If the Federal Reserve lowers the target federal funds rate:
| a. | The discount rate rises. | |
| b. | Liquidity in the banking system is increased. | |
| c. | Security prices fall. | |
| d. | Required reserves are also decreased. |
3 points
Question 35
1. The anticipation of inflation suggests that the investor should:
| a. | Buy bonds. | |
| b. | Anticipate higher interest rates. | |
| c. | Avoid real estate investments. | |
| d. | Sell stocks of gold companies. |
3 points
Question 36
1. The current ratio is unaffected by:
| a. | Using cash to pay a dividend. | |
| b. | The collection of an account receivable. | |
| c. | Selling inventory for a profit. | |
| d. | Selling bonds and using the funds to finance inventory. |
2 points
Question 37
1. Which of the following are true as the debt ratio increases?
1. Fewer assets are debt financed.
2. More assets are debt financed.
3. The ratio of debt equity increases.
4. The ratio of debt equity decreases.
| a. | 1 and 3. | |
| b. | 1 and 4. | |
| c. | 2 and 3. | |
| d. | 2 and 4. |
2 points
Question 38
1. The technical approach suggests that future stock prices are forecasted by:
| a. | Past stock rates. | |
| b. | Financial ratios. | |
| c. | Accounting statements. | |
| d. | Monetary policy. |
2 points
Question 39
1. The Dogs of the Dow strategy:
| a. | Forecasts the direction of the Dow Jones averages. | |
| b. | Suggests buying the Dow stocks with the highest dividend yields. | |
| c. | Outperforms the S&P 500. | |
| d. | Suggests buying the lowest-priced Dow stocks. |
3 points
Question 40
1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?
| a. | Accounting and finance. | |
| b. | Finance and psychology. | |
| c. | Physics and finance. | |
| d. | Finance and marketing. |
