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CHAPTER 2   1

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CHAPTER 2

 

1. Indicate whether the following instruments are examples of money market or capital market securities. a. U.S. Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred stocks e. Dealer commercial paper

 

2. What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.

 

CHAPTER 7

 

1. 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 that statement true or false? Explain. (Hint: Make up a “reasonable” example based on a 1-year and a 20-year bond to help answer the question.)

2. Discuss the following statement: A bond’s yield to maturity is the bond’s promised rate of return, which equals its expected rate of return.

 

CHAPTER 8

 

1. Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds.

a. Would your portfolio be riskless? Explain. b. Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 days your bills mature, and you will reinvest the principal ($250,000) in a new batch of bills. You plan to live on the investment income from your portfolio, and you want to maintain a constant standard of living. Is the T-bill portfolio truly riskless? Explain.

c. What is the least risky security you can think of? Explain.

 

2. Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain.

 

3. If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

 

 

CHAPTER 9

 

1. A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred issues that are more like bonds with finite lives? Explain.

 

2. Discuss the similarities and differences between the discounted dividend and corporate valuation models.

 

3. This chapter discusses the discounted dividend and corporate valuation models for valuing common stocks. Three alternative approaches, the P/E multiple, Enterprise Values, and EVA approaches, were presented. Explain each approach and how you might use each one to value a common stock.