Questions and Answers of Fundamentals Investments Valuation

Woodpecker, Inc., stock has an annual return mean and standard deviation of 18 percent and 44 percent, respectively. What is the smallest expected loss in the coming month with a probability of 2.5
DW Co. stock has an annual return mean and standard deviation of 12 percent and 30 percent, respectively. What is the smallest expected loss in the coming year with a probability of 5 percent?
The Layton Growth Fund has an alpha of 2.1 percent. You have determined that Layton’s information ratio is 0.5. What must Layton’s tracking error be relative to its benchmark?
In Problem 3, assume that the correlation of returns on portfolio Y to returns on the market is .75. What is the percentage of portfolio Y€™s return that is driven by the market?Data From
Assume that the tracking error of portfolio X in Problem 3 is 9.2 percent. What is the information ratio for portfolio X?Data From Problem 3You are given the following information concerning three
What is the Treynor measure for the Miranda Fund and the S&P 500?Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The market proxy and benchmark for
What is the Jensen alpha for the Miranda Fund?a. 0.2216b. 0.3515c. 0.0745Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The market proxy and benchmark for
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:What are the Sharpe ratio, Treynor ratio, and Jensen€™s alpha for each
You find the monthly standard deviation of a stock is 8.60 percent. What is the annual standard deviation of the stock?
What are the Sharpe ratios for the Miranda Fund and the S&P 500?Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund. The market proxy and benchmark for
You find a particular stock has an annual standard deviation of 54 percent. What is the standard deviation for a two-month period?
You are given the following information concerning a stock and the market:Calculate the average return and standard deviation for the market and the stock. Next, calculate the correlation between the
In Problem 12, what is the standard deviation if the correlation is +1? 0? ˆ’1? As the correlation declines from +1 to ˆ’1 here, what do you see happening to portfolio volatility?
A bond sells for $902.30 and has a coupon rate of 6 percent. If the bond has 12 years until maturity, what is the yield to maturity of the bond?
What is the monthly payment on a 30-year fixed-rate mortgage if the original balance is $315,000 and the rate is 4.9 percent?
If a mortgage has monthly payments of $1,240, a life of 30 years, and a rate of 4.5 percent per year, what is the mortgage amount?
A homeowner takes out a $417,000, 30-year fixed-rate mortgage at a rate of 5.2 percent. What are the monthly mortgage payments?
You have decided to buy a house. You can get a mortgage rate of 5.25 percent, and you want your payments to be $1,500 or less. How much can you borrow on a 30-year fixed-rate mortgage?
What does it mean for a mortgage pool to be fully modified?
What is the single monthly mortality assuming the conditional prepayment rate is 7 percent?
What is the conditional prepayment rate if the single monthly mortality is 0.426 percent?
A $100,000 GNMA pass through bond issue has a value of $107,680. The value of the interest-only payments is $52,973. What is the value of the principal only payment?
Explain in general terms how a protected amortization class (or PAC) CMO works.
What are the conditional prepayment rates for seasoned 50 PSA, 200 PSA, and 400 PSA mortgages if the 100 PSA benchmark is 3 percent per year? How do you interpret these numbers?
Mr. Blanda tells Mr. Houston to recalculate the SMM for Pool 3 based on 200 PSA rather than the current 100 PSA. The revised SMM is closest toa. 0.36 percentb. 0.55 percentc. 0.97 percent Mark
Mr. Blanda instructs Mr. Houston to calculate the weighted average coupon rate (WAC) for the mortgage pools. Which of the following is closest to the WAC?a. 7.28 percentb. 7.78 percentc. 8.01
Mr. Houston made a mistake in his research about the nature of mortgage loans. Which of the following statements regarding mortgage loans as compared to straight bonds is least accurate?a. Servicing
Regarding conditional prepayment rates (CPRs) and single monthly mortality (SMM) rates, which of the following is most accurate?a. SMM is computed from the CPR to compute monthly prepayments.b. SMM
A 30-year mortgage has an annual interest rate of 5.6 percent and a loan amount of $210,000. What are the monthly mortgage payments?
A 30-year mortgage has an annual interest rate of 6.1 percent and a loan amount of $270,000. What is the remaining balance at the 180th payment?
You found the following stock quote for Gigantus Corporation in today€™s newspaper. What was the stock selling for on January 1?Use the following bond quote for Problems 9 and 10:Data From
Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the pure expectations theory.a. The market expects short-term rates to rise through the
A Treasury STRIPS matures in 7 years and has a yield to maturity of 4.4 percent. If the par value is $100,000, what is the price of the STRIPS? What is the quoted price?
Mr. Wallace asks the trainees which of the following explains an upward-sloping yield curve according to the pure expectations theory. a. The market expects short-term rates to rise through the
A Treasury STRIPS is quoted at 90.875 and has 5 years until maturity. What is the yield to maturity?
According to the expectations theory, which of the following is closest to the one-year implied forward rate one year from now?a. 6.58 percentb. 5.75 percentc. 6.25 percentJames Wallace, CFA, is a
What is the yield to maturity on a Treasury STRIPS with 4 years to maturity and a quoted price of 70.485?
Mr. Wallace is particularly interested in the effects of a steepening yield curve. Which of the following is most accurate for a steepening curve?a. The price of short-term Treasuries increases
A stock had a return of 8.9 percent last year. If the inflation rate was 2.1 percent, what was the approximate real return?
Why do you suppose rates on some money market instruments are quoted on a bank discount basis?
Your investments increased in value by 11.6 percent last year, but your purchasing power increased by only 7.6 percent. What was the approximate inflation rate?
What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 million face value.
In Problem 7, What is the bond equivalent yield?Data From Problem 7What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.15 percent? Assume a $1 million
Evaluate the following statement: “Treasury inflation protected securities (TIPS) pay a fixed coupon.”
How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $1 million face value.
Discuss how each of the following theories for the term structure of interest rates could account for a downward-sloping term structure of interest rates:a. Pure expectationsb. Maturity preferencec.
In Problem 9, What is the bond equivalent yield?Data From Problem 9How much would you pay for a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 2.18 percent? Assume a $1
A Treasury bill purchased in December 2016 has 55 days until maturity and a bank discount yield of 2.48 percent. What is the price of the bill as a percentage of face value? What is the bond
The treasurer of a large corporation wants to invest $20 million in excess short-term cash in a particular money market investment. The prospectus quotes the instrument at a true yield of 3.15
What is the yield of the November €™17 STRIPS expressed as an EAR?U.S. Treasury STRIPS, close of business November 15, 2015: Price Price Maturity November '19 Maturity November '16 99.471
According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on November 15, 2016? What is the corresponding implied forward rate? How does your
According to the pure expectations theory of interest rates, how much do you expect to pay for a five-year STRIPS on November 15, 2016? How much do you expect to pay for a two-year STRIPS on November
Suppose the (quoted) yield on each of the six STRIPS increases by 0.05 percent. Calculate the percentage change in price for the one-year, three-year, and six-year STRIPS. Which one has the largest
Suppose you purchase a $1,000 TIPS on January 1, 2016. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent,
Consider the following spot interest rates for maturities of one, two, three, and four years.r1 = 4.3% r2 = 4.9% r3 = 5.6%
A Treasury bill that settles on May 18, 2016, pays $100,000 on August 21, 2016. Assuming a discount rate of 0.44 percent, what are the price and bond equivalent yield?
You have a car loan with a nominal rate of 5.99 percent. With interest charged monthly, what is the effective annual rate (EAR) on this loan?
Aloha Inc. has 7 percent coupon bonds on the market that have 12 years left to maturity. If the YTM on these bonds is 9.1 percent, what is the current bond price?
Mr. Spice asks Mr. Myers how a fixed-income manager would position his portfolio to capitalize on his expectations of increasing interest rates. Which of the following would be the most appropriate
Rolling Company bonds have a coupon rate of 4 percent, 14 years to maturity, and a current price of $1,086. What is the YTM? The current yield?
Mr. Spice asks Mr. Myers to quantify the value changes from changes in interest rates. To illustrate, Mr. Myers computes the value change for the fixed-rate note. He assumes an increase in interest
A bond has a coupon rate of 8.2 percent and 9 years until maturity. If the yield to maturity is 7.4 percent, what is the price of the bond?
For an increase of 100 basis points in the yield to maturity, by what amount would the fixed-rate bond€™s price change?a. ˆ’$7.49b. ˆ’$5.73c. ˆ’$4.63Frank
A bond with 25 years until maturity has a coupon rate of 7.2 percent and a yield to maturity of 6 percent. What is the price of the bond?
Mr. Spice wonders how a fixed-income manager could position his portfolio to capitalize on the expectation of an upward-shifting and twisting term structure. For the twist, interest rates on
A bond with a maturity of 12 years sells for $1,047. If the coupon rate is 8.2 percent, what is the yield to maturity of the bond?
May Industries has a bond outstanding that sells for $928. The bond has a coupon rate of 7.5 percent and nine years until maturity. What is the yield to maturity of the bond?
Atlantis Fisheries issues zero coupon bonds on the market at a price of $417 per bond. Each bond has a face value of $1,000 payable at maturity in 20 years. What is the yield to maturity for these
Atlantis Fisheries’ zero coupon bonds referred to in Problem 8 are callable in 10 years at a call price of $500. Using semiannual compounding, what is the yield to call for these bonds?Data From
If, instead, the Atlantis Fisheries zero coupon bonds referred to in Problems 8 and 9 are callable in 10 years at a call price of $550, what is their yield to call?
Ghost Rider Corporation has bonds on the market with 10 years to maturity, a YTM of 7.5 percent, and a current price of $938. What must the coupon rate be on the company’s bonds?
Great Wall Pizzeria issued 10-year bonds one year ago at a coupon rate of 6.20 percent. If the YTM on these bonds is 7.4 percent, what is the current bond price?
Soprano’s Spaghetti Factory issued 25-year bonds two years ago at a coupon rate of 7.5 percent. If these bonds currently sell for 108 percent of par value, what is the YTM?
For the bond referred to in Problem 14, what would be the realized yield if it were held to maturity?
Fooling Company has a 10 percent callable bond outstanding on the market with 25 years to maturity, call protection for the next 10 years, and a call premium of $100. What is the yield to call (YTC)
What is the dollar value of an 01 for the bond in Problem 23?Data From Problem 23What is the Macaulay duration of a 7 percent coupon bond with five years to maturity and a current price of $1,025.30?
A bond with a coupon rate of 8 percent sells at a yield to maturity of 9 percent. If the bond matures in 10 years, what is the Macaulay duration of the bond? What is the modified duration?
Assume the bond in Problem 27 has a yield to maturity of 7 percent. What is the Macaulay duration now? What does this tell you about the relationship between duration and yield to maturity?Data From
One method used to obtain an estimate of the term structure of interest rates is called bootstrapping. Suppose you have a one-year zero coupon bond with a rate of r1 and a two-year bond with an
You find that the one-, two-, three-, and four-year interest rates are 4.2 percent, 4.5 percent, 4.9 percent, and 5.1 percent. What is the yield to maturity of a four year bond with an annual coupon
A Treasury bond that settles on August 10, 2016, matures on April 15, 2021. The coupon rate is 4.5 percent and the quoted price is 106:17. What is the bond’s yield to maturity?
A bond that settles on June 7, 2016, matures on July 1, 2036, and may be called at any time after July 1, 2026, at a price of 105. The coupon rate on the bond is 6 percent and the price is 115.00.
A Treasury bond that settles on October 18, 2016, matures on March 30, 2035. The coupon rate is 5.30 percent and the bond has a 4.45 percent yield to maturity. What are the Macaulay duration and
Mr. Green and Ms. Hutchinson divided up their research into return enhancement and diversification benefits. Based upon the stated goals of their research, which of the two approaches is more likely
Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: State of Economy Probability of State of Economy Security Return if
Which of the following is closest to the expected return of the client€™s portfolio if 10 percent of the portfolio is invested in the New Horizon (NH) Emerging Market Fund?a. 11 percentb.
Using the information in Question 1, calculate the standard deviation of returns.Data From Problem 1Use the following information on states of the economy and stock returns to calculate the expected
Which of the following is closest to the expected standard deviation of the client€™s portfolio if 10 percent of the portfolio is invested in the Quality Commodity (QC) Fund?a. 9.6
Which of the following is closest to the expected return of a portfolio that consists of 90 percent of the original portfolio, 5 percent of the Hi Rise (HR) Real Estate Fund, and 5 percent of the
True or false: If two stocks have the same expected return of 12 percent, then any portfolio of the two stocks will also have an expected return of 12 percent.
Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): Ross Roll (3) Return if State Occurs
When combined with Beta Naught in a 50/50 portfolio, which of the other three funds will produce a portfolio that has the lowest standard deviation?a. New Horizon only.b. Quality Commodity only.c.
True or false: If two stocks have the same standard deviation of 45 percent, then any portfolio of the two stocks will also have a standard deviation of 45 percent.
Calculate the standard deviations for Roll and Ross by filling in the following table (verify your answer using returns expressed in percentages as well as decimals): (3) (4) Squared Return (5) (2)
Calculate the expected return on a portfolio of 55 percent Roll and 45 percent Ross by filling in the following table: (2) Probability of State of Economy (4) (3) Portfolio Return if State Occurs
Assume you are a very risk-averse investor. Why might you still be willing to add an investment with high volatility to your portfolio?
Calculate the volatility of a portfolio of 35 percent Roll and 65 percent Ross by filling in the following table: (4) (5) Product (2) × (4) (2) (3) Portfolio Return if State Occurs (1) State of
Based on the following information, calculate the expected return and standard deviation for the two stocks. Rate of Return if State Occurs State of Probability of State of Economy Economy Stock A
True or false: It is impossible for a single asset to lie on the Markowitz efficient frontier.
Consider the following information:a. Your portfolio is invested 25 percent each in A and C and 50 percent in B. What is the expected return of the portfolio?b. What is the variance of this

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