Question

Which of the following statements is/are true?

Multiple Choice

• A. A portfolio comprised soley of U.S. Treasury bills will have a beta of 1.

• B. A portfolio that has just as much risk as the overall market will have a beta of 0.

• Both A and B are true

• Neither A or B are true.

Under which of the following circumstances will the value of a stock go up?

Multiple Choice

• Increase in the market rate of return

• Decrease in the expected dividend for next year

• Decrease in the dividend growth rate

• Increase in the required return

• Increase in the capital gains yield

Which one of the following statements is/are true?

Multiple Choice

• A.  If the expectation for inflation is that it will steadily increase, the term structure of interest rates will be upward sloping.

• B. If a small rural city issues municipal bonds and there is no active secondary market to sell the bonds, investors will require a higher liquidity premium compared to a bond with a very active secondary market.

• Both A and B are true.

• Neither A nor B are true.

Gibralter, Inc. issued one year ago annual coupon paying bonds that orignially had 13 years to maturity. These bonds have a face value of $1,000 and a current market value of $1,030. At this market value, the bonds have a yield-to-maturity of 4.14% What is the coupon rate for these bonds?

Answer 1

1) Neither A or B are true
Option A is false as US treasury bills have 0 beta
Option B is false as over market have beta of 1 , hence portfolio will also have beta of 1

2) Increase in the capital gains yield
Option A is false as increase in market rate of return will lead to increase in required returnnd thus will lead to decrease in price of share
Option B is false as Decrease in expected dividend leads to decrease in share price
Option C is false as Decrease in the dividend growth rate leads to decrease in share price
OPtion D is false as Increase in the required return leads to decrease in share price

3) Both A and B are true.
Inflation leads to increase in interest rate
Yes if bonds have illiquid market investor will require high liquidity premium to compensate that risk

4) Here n = no of year till maturity = 12 years

Face value = $1000

Current market value = $1030

YTM = 4.14%

YTM = Interest + (Face value - current market price)/n / (Face value + current market price)/2

4.14% = Interest + (1000-1030)/12 / (1000+1030)/2

4.14% = Interest + (-30/12) / 2030/2

4.14% = Interest -2.5 / 1015

42.021 = Interest -2.5

Interest = 44.52 $

Thus coupon rate = Interest/Face value of bond

= 44.52/1000

=0.04452

i.e 4.45%