Question

Using a regression to estimate beta, we run a regression with returns on the stock in question plotted on the Y axis and returns on the market portfolio plotted on the X axis. The intercept of the regression line, which measures relative volatility, is defined as the stock’s beta coefficient, or b.

		True.
		FALSE

A 10-year corporate bond has an annual coupon payment of 2.8%. The bond is currently selling at par ($1,000). Which of the following statement is NOT correct?

		The bond’s yield to maturity is 2.8%.
		The bond’s current yield is 2.8%.
		If the bond’s yield to maturity remains constant, the bond’s price will remain at par.
		The bond’s capital gain yield is 2.8%.

Call Provision gives issuing corporations the right to call the bonds for redemption. Generally it occurs when interest rate increases substantially. The company should pay additional amount above the par value to the called bondholders, which is call premium.

		True.
		False.

Under what forms of Efficient Market Hypothesis, investors cannot profit via inside information?

		Weak-form Efficient Market Hypothesis
		Semi-strong form Efficient Market Hypothesis
		Strong-form Efficient Market Hypothesis
		All of above.

Answer 1

1. False

Intersect of regression line on x axis is alpha that denotes the location on y axis when x is 0.

Beta explains the slope of regression line.

2. d. The bonds capital gain yeild is 2.8%

YTM = Coupon Rate, when MV = face value

Capital gain is 0.

Because capital gain = MV - Face value (buying price)

3. False

An issuer will usually call the bond when interest rate fall. This calling leaves the investor exposed to replacing the investment at a rate that will not return the same level of income.

4. c. Strong form efficient market hypothesis

As insider information is already incorporated in prices in strong form efficient market so one cannot make profit on the basis of insider information.

In weak form and semi strong form efficient market insider information aren't there in prices, so one can make profit on the basis of insider information in these markets.