Questions and Answers of Fundamentals Of Investments Valuation

a. What is a stock market bubble? A stock market crash?b. What are NYSE circuit breakers? What are they intended to do?c. What is a major difference between the Crash of October 1929 and the Crash of
Assume the market is semistrong form efficient. The best investment strategy is to:a. Examine the past prices of a stock to determine the trend.b. Invest in an actively managed mutual fund whose
Assume the market is weak form efficient. If this is true, technical analysts _____ earn abnormal returns and fundamental analysts _____ earn abnormal returns.a. Could; couldb. Could; could
Which of the following is not true concerning the efficient markets hypothesis?a. Markets that are less organized are not as likely to be efficient.b. Markets with wide fluctuations in prices
You purchase a stock that you expect to increase in value over the next year. One year later, after the discovery that the CEO embezzled funds and the company is close to bankruptcy, the stock has
Consider the following series of monthly stock prices for two hypothetical companies:On a relative basis, how has Susan, Inc., done compared to Carolyn Co.? Month 1 STAW N 2 3 6 Susan,
Which of the following statements concerning market efficiency is true?a. If the market is weak form efficient, it is also semistrong form efficient.b. If the market is semistrong form efficient,
Consider the following series of weekly stock prices for two companies:On a relative basis, how has Cats Co. done compared to Dog Power? Week 1 GAW N 6 Cats Co. $10 12 16 15 14 12 Dog
a. What is behavioral finance?b. What three conditions must be absent for a market to be inefficient?
Which of the following is a basic assumption of technical analysis in contrast to fundamental analysis?a. Financial statements provide information crucial in valuing a stock.b. A stock’s market
Construct a basic price chart for Caterpillar (CAT).
Using the prices from Problem 1, calculate the three-week simple moving average prices for both companies.Problem 1Consider the following series of weekly stock prices for two companies:On a relative
a. What is the basic prediction of prospect theory?b. What is frame dependence?c. How does loss aversion affect investment decisions?
Which of the following is least likely to be of interest to a technical analyst?a. A 15-day moving average of trading volumeb. A relative strength analysis of stock price momentumc. Company
Review the list of technical factors that can be added to a chart.
a. How does overconfidence appear in investment behavior?b. What are the effects of trading frequency on portfolio performance?c. How does the snakebite effect impact investors?
Dow theory asserts that three forces are at work in the stock market at any time. Which of the following is not one of these Dow theory forces?a. Daily price fluctuationsb. A secondary reaction or
The table below shows the closing monthly stock prices for Penn Co. and Teller, Inc. Calculate the simple three-month moving average for each month for both companies.
Identify which technical indicator has been most profitable for trading Cisco (CSCO).
a. What is the representativeness heuristic?b. What is the hot-hand fallacy? How could it affect investor decisions?c. What is the gambler’s fallacy? How could it affect investor decisions?
The advance/decline line is typically used to:a. Measure psychological barriers.b. Measure market breadth.c. Assess bull market sentiment.d. Assess bear market sentiment.
Using the stock prices in Problem 3, calculate the exponential three-month moving average for Penn and Teller. Place 50 percent of the average weight on the most recent price. How does this
The closing Arms (TRIN) ratio is the ratio of:a. Average trading volume in declining stocks to advancing stocks.b. Average trading volume in NYSE stocks to Nasdaq stocks.c. The number of advancing
a. What does the term “limits to arbitrage” mean?b. If there were no limits to arbitrage, what would have been the relationship between 1 share of 3Com and 1.5 shares of Palm?c. If there were no
Resistance and support areas for a stock market index are viewed as technical indicators of:a. Economic barriers.b. Psychological barriers.c. Circuit breakers.d. Holding patterns.
a. What is technical analysis?b. What is the purpose of charting a stock’s past price?c. What is the purpose of using technical indicators?
Suppose you are given the following information on a broad equity market index:Calculate the simple three-day moving average for the index and the exponential three-day moving average where
When companies changed the structure of 401(k) plans to allow employees to opt out rather than in, the participation rates significantly increased.This is an example of:a. Representativeness.b. The
When someone who wins money is more willing to lose the gains, this is referred to as:a. Representativeness.b. The house money effect.c. Frame dependence.d. A heuristic.
Investors are generally more likely to choose a wellknown company when faced with a choice between two firms. This is an example of:a. Representativeness.b. The house money effect.c. Frame
Many investors try to simplify the investment process by using rules of thumb to make decisions. This is an example of:a. Representativeness.b. The house money effect.c. Frame dependence.d. A
All of the following are ways to help reduce behavioral biases except:a. Learning about the biases.b. Diversifying your portfolio.c. Watching more financial news programs.d. Creating objective
Which of the following topics related to behavioral finance deals with the idea that investors experience more pain from a loss than pleasure from a comparable gain?a. Frame dependenceb. Prospect
Which of the following is not a reason that rational, well-capitalized investors can correct a mispricing, at least not immediately?a. Firm-specific riskb. Implementation costsc. Aversion
Use the information from Problem 13 to calculate the three-day and five-day exponential moving averages for Auction Makers and graph your results. Place two-thirds of the average weight on the most
Which of the following techniques deals with the breadth of the market?a. Price channelsb. Advance/decline linesc. Bollinger bandsd. Support and resistance lines.
From the data below for the Dow Jones Industrial Average, calculate the three-day simple moving average. Fill in the “Buy/Sell Signal” column for this trading indicator. Then, calculate the
Which of the following techniques does not assume there are psychologically important barriers in stock prices?a. Price channelsb. Advance/decline linesc. Bollinger bandsd. Support and resistance
From the data below, calculate the upper and lower Bollinger bands, which represent plus (or minus) two standard deviations of the 20-day simple moving average added (subtracted) from the 20-day
a. Which money market interest rates are most important to commercial banks?b. Which money market interest rates are most important to nonbank corporations?
The rate on a particular money market instrument, quoted on a discount basis, is 5 percent. The instrument has a face value of $100,000 and will mature in 40 days. What is its price?
Which of the following interest rates is a bellwether (leading indicator) rate of bank lending to business?a. Unsecured business loan rateb. Prime ratec. Commercial paper rated. Banker’s
Compare benchmark interest rates across countries.
Undoubtedly, your instincts tell you that $1,000 received in three years is not the same as $1,000 received today. But if you are going to receive $1,000 today, what is an equivalent amount of money
a. What are the three different types of interest rate quotes that are important for money market instruments?b. How are T-bill rates quoted? How are CD rates quoted?c. Of the three different types
Suppose a T-bill has 75 days to maturity and an ask discount of 4 percent. What is the bond equivalent yield?
Among the following interest rates, which is normally the highest rate?a. Commercial paper rateb. U.S. Treasury bill ratec. Federal funds rated. Federal Reserve discount rate.
The rate on a particular money market instrument, quoted on a discount basis, is 4 percent. The instrument has a face value of $100,000 and will mature in 71 days. What is its price? What if it has
a. What is the yield curve? Why is it important?b. Why are corporate bond yields higher than Treasury bond yields?c. Why are municipal bond yields lower than Treasury bond yields?
Download a pricing calculator for bonds and explore the primary inputs.
U.S. Treasury bill with 180 days to maturity has a discount yield of 5 percent and a face value of $100,000. What is its current price?a. $97,500b. $95,000c. $92,500d. $90,000.
Suppose you wanted to buy a T-bill with 85 days to maturity and a face value of $5,000,000. How much would you have to pay if the ask discount is 3.41 percent?
a. What is the yield to maturity (YTM) on a STRIPS maturing in five years if its ask price quote is 77.75?b. What is the YTM of a STRIPS maturing in 15 years if its ask price quote is 36.813?c. What
Examine the current yield curve and identify whether it is a traditional upward-sloping pattern.
A U.S. Treasury bill with 90 days to maturity has a price of $95,000. What is its discount yield?a. 5 percentb. 10 percentc. 15 percentd. 20 percent.
Suppose a T-bill has 45 days to maturity and an ask discount of 5 percent. What is the bond equivalent yield?
a. What is the difference between a nominal interest rate and a real interest rate?b. What does the Fisher hypothesis assert?c. What is the distinguishing feature of inflation-indexed Treasury
A 30-day U.S. Treasury bill is selling at a 12 percent yield on a discount basis. Which of the following is the approximate bond equivalent yield?a. 6.0 percentb. 11.7 percentc. 12.0
What is SOFR? Why is it important?
Calculate the ask yield (bond equivalent yield) for a T-bill price quoted in December 2023 with 119 days to maturity and an ask discount of 5.41 percent.
a. According to the expectations theory, what does an upward-sloping term structure indicate?b. What basic assertion does maturity preference theory make about investor preferences? If this assertion
Generate an RSI chart for CVS.
a. What is the “1/n phenomenon”?b. Explain herding behavior by investors.c. What potential biases might affect how you invest?
Suppose we have two bonds, both with a 6 percent coupon rate and the same yield to maturity of 4 percent, but with different maturities of 5 and 15 years. Which has the higher price? Verify your
In which one of the following cases is the bond selling at a discount?a. Coupon rate is greater than current yield, which is greater than yield to maturity.b. Coupon rate, current yield, and yield
a. What is a straight bond?b. What is a bond’s coupon rate? Its current yield?
Consider two bonds, both with eight years to maturity and a 7 percent coupon. One bond has a yield to maturity of 5 percent, while the other has a yield to maturity of 9 percent. Which of these bonds
a. A straight bond’s price has two components. What are they?b. What do you call a bond that sells for more than its face value?c. What is the relationship between a bond’s price and its term to
Download an Excel template for comparing fixed-income products.
A bond has a Macaulay duration of nine years, and its yield increases from 6 percent to 6.25 percent. What will happen to the price of the bond?
When are yield to maturity and current yield on a bond equal?a. When market interest rates begin to level offb. If the bond sells at a price in excess of its par valuec. When the expected holding
Consider two bonds, both with a 9 percent coupon rate and the same yield to maturity of 7 percent, but with different maturities of 5 and 10 years. Which has the higher price?
Explore the duration characteristics for a Home Depot (HD) corporate bond.
a. What does it mean for a bond to be callable?b. What is the difference between yield to maturity and yield to call?c. Yield to call is calculated just like yield to maturity except for two changes.
Now consider two bonds, both with a 9 percent coupon rate and the same yield to maturity of 11 percent, but with different maturities of 5 and 10 years. Which has the higher price? Verify your answer
Which of the following states the correct relationship among yield measures for discount bonds?a. Coupon rate < Current yield < Yield to maturityb. Current yield < Coupon rate < Yield to
a. True or false: A bond price’s sensitivity to interest rate changes increases at an increasing rate as maturity lengthens.b. Which is more sensitive to an interest rate shift: a low-coupon bond
Which of the following states the correct relationship among yield measures for premium bonds?a. Coupon rate > Current yield > Yield to maturityb. Current yield > Coupon rate > Yield to
Suppose a bond has eight years to maturity, a price of 110, and a coupon rate of 8 percent. What is its yield?
An analyst gathered the following spot rates:The one-year forward rate two years from now is closest to:a. −4.91 percentb. 5.17 percentc. 10.05 percentd. 7.5 percent. Time (years) 1 234 Annual
a. What is the relationship between modified duration and the dollar value of an 01?b. What is the relationship between the dollar value of an 01 and the yield value of a 32nd?
An 8.5 percent coupon bond maturing in 15 years is callable at 105 in 5 years. If the price is 100, which is bigger, the yield to call or the yield to maturity?
a. What is a dedicated portfolio?b. What is reinvestment rate risk?
Suppose a par value bond has a 6 percent coupon and 10 years to maturity. What is its duration?
An analyst finds that the semiannual interest rate that equates the present value of the bond’s cash flow to its current market price is 3.85 percent. Consider the following possible
According to the pure expectations theory of interest rates, how much do you expect to pay for a one-year STRIPS on February 15, 2023? 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 February 15, 2023? How much do you expect to pay for a two-year STRIPS on February
The Fisher hypothesis essentially asserts which of the following?a. Nominal interest rates follow inflation.b. Real interest rates follow inflation.c. Inflation follows real interest
An analyst gathers the following information:Based on the data above, the one-year implied forward rate two years from now is closest to:a. 6.25 percentb. 7.01 percentc. 7.26 percentd. 7.51
A Treasury bill purchased in January 2024 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
Which one of the following is not an explanation of the relationship between a bond’s interest rate and its term to maturity?a. Default (credit) risk hypothesisb. Expectations
Which theory explains the shape of the yield curve by considering the relative demands for various maturities?a. Relative strength theoryb. Segmentation theoryc. Unbiased expectations
The concepts of spot and forward rates are most closely associated with which one of the following explanations of the term structure of interest rates?a. Expectations hypothesisb. Liquidity
The current one-year interest rate is 7 percent and the current twoyear interest rate is 6 percent. What is the implied forward rate for next year’s one-year rate?a. 7 percentb. 6 percentc. 5
The current one-year interest rate is 6 percent and the current twoyear interest rate is 7 percent. What is the implied forward rate for next year’s one-year rate?a. 9 percentb. 8 percentc. 7
The six-month Treasury bill spot rate is 4 percent, and the one-year Treasury bill spot rate is 5 percent. The implied six-month forward rate six months from now is which of the following?a. 3.0
A Treasury bill that settles on May 18, 2022, pays $100,000 on August 21, 2022. Assuming a discount rate of .44 percent, what are the price and bond equivalent yield?
What is the price of a Treasury STRIPS with a face value of $100 that matures in five years and has a yield to maturity of 3.3 percent?
Suppose a bond has 10 years to maturity and a coupon rate of 6 percent. The bond’s yield to maturity is 8 percent. What’s the price?
The yield to maturity on a bond is:a. Below the coupon rate when the bond sells at a discount and above the coupon rate when the bond sells at a premium.b. The interest rate that makes the present

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