EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 15, Problem 1CP
Summary Introduction
To determine: The reasons contributing to bonds with different maturities have different yields and the implications of each hypothesis on upward-sloping yield curve and downward-sloping yield curve.
Introduction: Using Expectations Theory, one can try to predict the short-term interest rates will be based on the existing long-term rates.
Liquidity Preference Theory suggests the investors to demand higher interest rates or premium rates for holdings with long-term maturities and higher risk.
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Explain why bonds of different maturities have different yields in terms of expectations hypotheses. Describe the implications of the hypothesis when the yield curve is upward-sloping.
Explain why bonds of different maturities have different yields in terms of liquidity preference hypotheses. Describe the implications of the hypothesis when the yield curve is upward-sloping.
The yield curve varies over time based the relative riskiness of buying a single long-term bond versus purchasing multiple short-term bonds. This explanation of the yield curve is most consistent with
A.the Fisher Effect theoryB.the market segmentation theoryC.the unbiased expectations theoryD.the liquidity preference theory
Describe each of the following methods for estimating the cost of equity: (a) the CAPM, (b) DCF,and (c) the bond-yield-plus-risk-premium.Where can you obtain inputs for each of thesemethods, and how accurate are estimates basedon each procedure? Can you state categoricallythat one method is better than the others, or doesthe “best” method depend on the circumstances?
Chapter 15 Solutions
EBK INVESTMENTS
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- The inverted yield curve predicts that bond prices will fall. Select one: True OR Falsearrow_forwardUse the following information to answer this question. In your answers, ignore the negative sign, if any. Yield on Bond A Yield on Bond B Yield on Bond C 5.50% 6.50% 3.50% a) What is the yield spread between bonds A and B (in basis points)? b) What is the relative yield spread between bonds B and C? Bond C is your basis. c) What is the yield ratio between A and C? Bond C is your basis.arrow_forwardWhich of the following statements is CORRECT? a. Lower beta stocks have higher required returns. b. A stock's beta indicates its diversifiable risk. c. Diversifiable risk cannot be completely diversified away. d. Two securities with the same stand-alone risk must have the same betas. e. The slope of the security market line is equal to the market risk premium.arrow_forward
- Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments:a. Both the CAPM and APT require a mean-variance efficient market portfolio.b. Neither the CAPM nor the APT assumes normally distributed security returns.c. The CAPM assumes that one specific factor explains security returns but APT does not.State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.arrow_forwardExplain the differences between a bond's yield to maturity (YTM) and its yield to call (YTC). Is there a reason why the return to the investor would alter if a bond is called? Please provide justification for your response.arrow_forwardWhich of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.arrow_forward
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