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

Answer 1) FALSE

Beta which captures the systematic risk of the security is defined as the slope in the regression line and not the intercept.example: Slope = 1.5, you can interpret this as 1.5/1 and say that as you move along the regression line, as the value of the X variable increases by 1, the value of the Y variable increases by 1.5.

Answer2)  Option D) The bond's capital gain yield is 2.8%.

If a bond is issued at par, this means that the coupon rate is equal to its Yield to maturity.

Option A) will not be the answer because its yield to maturity will be equal to the coupon rate.

Option B) will not be the answer because the current yield for a bond issued at par will be equal to the YTM.

Option C) will not be the answer becuase the price of the bond will remain at par if YTM remains constant.

Option D) is the answer as it is the incorrect option. The capital gain yield will be caluclated as increase in price. Since the price will remain at par, the capital gain yield will not be 2.8%.

Answer 3) FALSE

The callable bonds are called back by the issuing company when the interest rates have fallen. This is because they are paying a higher interest rate than what is prevailing in the market.

Answer 4) STRONG FORM EFFICIENT MARKET HYPOTHESIS

The strong form of efficient market hypothesis states that both publicly avaulable information and any information not publicly known is entirely accounted for in current stock market prices. Hence, no type of information can give an investor an advantage over other market participants.

Weak form efficient hypothesis states that past prices and historical values , trends can't predict future prices.

Semi Strong form efficient hypthesis concludes that stock prices only include publicly available information and hence investors with inside information can highly benefit.