Which of the following is false? 1. When given the annual withdrawals desired during the retirement period, PVA tells us the amount we should have accumulated by the time we retire. II. For fixed-rate fully amortized mortage loans, less of the fixed payment goes towards interest as we approach the end of the loan term. III. The right-hand side variables in the PV formula represent the three key factors determining stock prices. O A. O B. O C. II only OD. I only None of the above All of the above

Which of the following is false? 1. When given the annual withdrawals desired during the retirement period, PVA tells us the amount we should have accumulated by the time we retire. II. For fixed-rate fully amortized mortage loans, less of the fixed payment goes towards interest as we approach the end of the loan term. III. The right-hand side variables in the PV formula represent the three key factors determining stock prices. O A. O B. O C. II only OD. I only None of the above All of the above

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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It is given that dP/dt = rP (r being the annually compounded interest rate and P is the amount in the account at any given time). Suppose that an account earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption). Use phase line analysis to analyze the behavior of the account. Discuss the meaning of any equilibrium points and their stability. If r = 10% (a reasonable rate for long-term stock investments), and H = $10,000, how long should an initial investment of $50,000 be left untouched so that when withdrawals begin the capital is not depleted?
Which of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investment b1 b2 X 1.75 0 Y −1.00 2.00 Z 2.00 1.00 We assume that the expected risk premium is 7.8% on factor 1 and 11.8% on factor 2. Treasury bills obviously offer zero risk premium. According to the APT, what is the risk premium on each of the three stocks? Suppose you buy $500 of X and $125 of Y and sell $375 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Suppose you buy $200 of X and $150 of Y and sell $100 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Finally, suppose you buy $400 of X and $50 of Y and sell $200 of Z. What is your portfolio's sensitivity now to each of the two factors? And what is the expected risk premium?
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investments b1 b2 X 1.75 0.25 Y 1.00 2.00 Z 2.00 1.00 Assume that the expected risk premium is 4% on factor 1 and 8% on factor 2. Treasury bills offer zero risk premium. a. According to the APT, what is the risk premium on each of the three stocks? b. Suppose you buy $200 of X and $50 of Y and sell $150 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? c. Suppose you buy $80 of X and $60 of Y and sell $40 of Z. What is the sensitivity of your portfolio to…
Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The interest rate risk premium always adds a downward bias to the slope of the yield curve. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.
Determine whether the following statements are TRUE or FALSE. Briefly explain your answers. (a) “When a consol is priced above its par value, the yield to maturity equals coupon rate.” (b) "If the actual inflation rate is higher than expected, both borrowers and lenders will lose"
Assess the following statements: The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates. According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments. The liquidity premium theory of interest rates states that the term structure must always be upward sloping. The liquidity premium theory of interest rates states that investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected future short term rates. a. Two statements are correct. b. Three statements are correct. c. Only one statement is correct. d. Four statements are correct.
Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?
You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9% Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]
Consider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −8 % 21 % Normal economy 0.50 22 % 9 % Boom 0.20 32 % 9 % a. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? No Yes b. Calculate the expected rate of return and standard deviation for each investment. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.) c. Which investment would you prefer?
Assume that inflation is expected to steadily increase in the years ahead, but that the real risk-free rate r*, is expected to remain constant. Which of the following statements is most correct? None of the answers are correct. The treasury yield curve must be upward sloping. If the expectations theory holds, the treasury yield curve must be downward sloping. If the expectations theory holds, the yield curve for corporate securities must be downward sloping.
At any point in time forward rates computed by the yield curve represent the market's best estimates about the future course of short-term interest rates. Hence, for an individual investor who has a one-period investment horizon, it makes no difference what the term to maturity is on the individual security purchased. True/false?

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