The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term interest rates. Therefore, short-term bond prices are more sensitive to interest rate changes than are long-term bond prices." Is this statement true or false? Explain.
The rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rate in the economy rise after the bond has been issued, what will happen to the bond's price and to its YTM? Does the length of time to maturity affect the extent to which is given change in interest rates will affect the bond's price?
If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.
4) Q10-2 p 410
Two investors are evaluating AT&T's stock for possible purchase. They agree on the expected value of D and also on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stock for 2 years, while the other normally holds stocks for 10 years. On the basis of the type of analysis done in this chapter, they should both be willing to pay for AT&T's stock. True or false? Explain.
5) Q10-4, p. 410,
If you bought a share of common stock, you would typically expect to receive dividends plus capital gains. Would you expect the distribution between dividend yield and capital gains to be influenced by the firm's decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.
6) If investor's aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.
7) If a company's beta were to double, would its expected return double.
8) To begin briefly review the attached mimi case spreadsheet. Then extend your knowledge of risk and return by answering the following two questions.
a. What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model?
b. Now add the risk-free asset. What impact does this have on the efficient frontier?
9) 8-11 Universal Bank pays 7 percent interest, compounded annually, on time deposits. Regional Bank pays 6 percent interest, compounded quarterly.
a. Based on effective interest rates, in which bank would you prefer to deposit your money?
b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? In answering this questions, assume that funds must be left on deposit during the entire compounding period in order for you to receive any interest.
This solution answers 9 financing questions, addressing risk-free assets, compound interest and callable bonds.