Q&A Hero

Q: Countries are divided into developed and emerging markets based on the market capitalization of their stock market.

Q: Brazil, China, and India have had the biggest increase in market capitalization of all the emerging market countries

Q: U.S. multinational corporations are highly correlated with United States financial markets and therefore do not reduce portfolio risk to the same extent as investing in foreign corporations.

Q: Risk exposure to foreign currency changes can be hedged through foreign exchange contracts or foreign currency options.

Q: Most major foreign firms listed on the New York Stock Exchange, such as Canada Pacific Railway, trade their stocks directly on the NYSE rather than using ADRs.

Q: The Securities Exchange Commission does not allow mutual funds to own foreign securities in their portfolios.

Q: American depository receipts allow foreign stocks to be traded in the United States markets very similarly to U.S. stocks.

Q: As a general rule, transaction costs are lower in foreign markets than in the United States.

Q: Information on publicly traded foreign securities is not as regulated or as available as it is on United States securities.

Q: At the peak of the stock market bubble in 1999, the value of the developed world's stock market was $33 trillion. By 2002, the value had declined to less than $21 trillion. By year-end 2005, after several years of worldwide economic growth, the developed markets reached $36.5 trillion.

Q: Duration is: A.positively correlated with interest rates and coupon rates but moves in the opposite direction of maturity. B.negatively correlated with maturity but moves in the same direction as market rates of interest and coupon rates. C.positively correlated with maturity but moves in the opposite direction of market rates of interest and coupon rates. D.None of the above

Q: If the emerging markets were taken as a group at the end of 2005, their total market capitalization would rank them second behind the United States.

Q: Foreign exchange risk is not a major concern to international investors because there have been fewer wide swings in currency values in recent years.

Q: Duration is influenced by everything except: A.maturity. B.market rate of interest. C.coupon rate on the bond. D.the issuer of the bond.

Q: Political risk can best be effectively reduced or eliminated by investing only in companies of European countries.

Q: Duration represents the weighted average life of a bond where the weights are based on the: A.future value of the individual cash flows relative to the present value of the total cash flows. B.present value of the individual cash flows relative to the future value of the individual cash flows. C.present value of the individual cash flows relative to the present value of the total individual cash flows. D.future value of the individual cash flows relative to the future value of the individual cash flows.

Q: Less developed countries may provide even greater risk returns in a portfolio than developed countries.

Q: Due to the lessened risk exposure through effective international portfolio diversification, the rate of return tends to be somewhat lower than on portfolios composed entirely of United States securities.

Q: Under terminal wealth analysis, the greater the period to maturity, A.the greater the shift in interest rates. B.the greater the effect of a decrease in interest rates. C.the greater the effect of any shift in interest rates. D.None of the above

Q: From 1976-2009 Japan had the lowest equity market returns 13 out of 34 years.

Q: Under which of the following circumstances would terminal wealth analysis NOT be relevant? A.When the bond is sold prior to maturity B.When market interest rates rise above the coupon rate C.Terminal wealth analysis is ALWAYS relevant D.None of the above

Q: The main advantage of international investment is that foreign markets may be negatively correlated with U.S. and other foreign markets.

Q: The process of measuring the effect of a shift in market interest rates on the value of an investment is called: A.duration analysis. B.immunization. C.terminal wealth analysis. D.None of the above

Q: Volatile high interest rates have directly caused more emphasis on duration analysis because: A.investors have responded to the new environment by switching from short-term to longer-term securities. B.prices of longer-term bonds are more sensitive to shifts in interest rates than shorter-term bonds. C.duration analysis measures the degree of bond price sensitivity. D.All of the above

Q: Assume you buy a 20-year, $1,000 par value zero-coupon bond that provides a 12% yield to maturity. Almost immediately after you buy the bond, yields decrease to 9%. What will be the percentage gain on the investment?

Q: What type of bond investor would probably be least concerned about a drop in market interest rates? A.Individuals who spend their interest income B.Individuals who are building a retirement portfolio C.Pension fund managers D.All of the above would have cause for concern

Q: Compute the duration for a bond with an 8% coupon rate, maturing in five years. A discount rate of 10% should be applied.

Q: You have invested $1,000 in a 12% coupon bond that matures in three years. You are investing the interest income in a fund earning 8%. At the end of three years, what will be your portfolio sum?A.$1,120.00B.$1,249.60C.$1,360.00D.$1,389.57E.$1,540.73

Q: The duration of a bond is determined by a combination of the maturity date and value, and: A.the pattern of coupon payments. B.the call premium. C.the put premium. D.None of the above

Q: One of the major criticisms of duration analysis is: A.the difficulty of measuring the market rate of interest. B.the assumption that long-term and short-term interest rates move by equal amounts. C.the assumption that long-duration bonds are more price-sensitive than short-duration bonds. D.None of the above

Q: Compute the duration for the data in this problem using a discount rate of 12%. A.3.00 years B.2.95 years C.2.85 years D.2.75 years E.2.65 years

Q: When duration of a coupon paying bond is plotted against years to maturity on the X axis, the line: A.is linear. B.is concave. C.is convex. D.is linear at a 45 degree angle.

Q: The value of a bond may be expressed as the sum of: A.the interest payments and the maturity value. B.the present value of the par value and the present value of the sum of the interest payments. C.the present value of the maturity value and the sum of the present values of the interest payments. D.None of the above

Q: A terminal wealth table generates the ending value of the investment at the end of the year, assuming that the bond: A.has a maturity date corresponding to that year. B.has a maturity date corresponding to the next year. C.is a zero-coupon bond. D.None of the above

Q: Immunization is the process of ________ to ensure an outcome. A.measuring bond price sensitivity to interest rates B.tying all investment decisions to a particular market interest rate C.tying all investment decisions to a duration period D.none of the above

Q: In general, duration is the number of years, on a future-value basis, that it takes to recover an initial investment in a bond.

Q: For all bonds of equal risk, the type of bond that had the greatest duration, and therefore the greatest price sensitivity, is: A.Treasury bonds. B.zero-coupon bonds. C.corporate bonds. D.long-term government bonds.

Q: One of the benefits of zero-coupon bonds is that they lock in a compound rate of return (or reinvestment rate) for the life of the bond, if held to maturity.

Q: Duration is used primarily as a measure of: A.the relationship between coupon rate and bond rating. B.bond price-sensitivity to interest rate changes. C.the present value of investment inflows. D.None of the above

Q: The duration on an 8%, 25-year bond is ______ the duration on a 9%, 30-year bond. A.greater than B.less than C.equal to D.there is not enough information to tell

Q: Weighted average life refers to the time period over which the coupon payments and maturity payment on a bond are recovered.

Q: The highest duration and maximum price sensitivity relative to years to maturity are produced by: A.a coupon rate equal to the market rate. B.a low coupon rate. C.a zero-coupon. D.None of the above

Q: It is possible that a bond with a shorter maturity than another bond may actually have a longer duration and be more sensitive to interest rate changes.

Q: The duration of a 20-year, $1,000 bond at a COUPON rate of 8% is _________ the duration of an identical bond at a coupon rate of 6%. A.greater than B.less than C.equal to D.there is not enough information to tell

Q: One of the problems with duration is that it often assumes a parallel shift in yield curves.

Q: The actual yield to maturity an investor receives becomes more of a function of the reinvestment rate the shorter the maturity of the bond.

Q: The duration of a 40-year, $1,000 bond at a market rate of 4% is _________ the duration of an identical bond at a market rate of 6%. A.greater than B.less than C.equal to D.there is not enough information to tell

Q: Duration is affected primarily by: A.the maturity of the bond. B.the market rate of interest. C.the coupon rate. D.All of the above

Q: Terminal wealth analysis for a zero-coupon bond is irrelevant.

Q: Factors which influence the relationship between duration and maturity include all of the following EXCEPT: A.the face value of the bond. B.the coupon rate of the bond. C.the number of years to maturity. D.All of the above are factors

Q: As the yield to maturity on a bond increases, the duration also increases because of the effect of present value on duration.

Q: For two bonds with equal coupons, duration would be higher for the bond with the shortest maturity.

Q: Duration equals maturity if: A.all cash flows are paid at the end of the year. B.the coupon rate equals the market rate. C.the bond is a zero-coupon bond. D.More than one of the above

Q: As the maturity or duration of a bond increases, the impact on price of any changes in interest rates increases at a decreasing rate.

Q: High coupon bonds will usually have higher durations than low coupon bonds of the same maturity.

Q: The only difference between the simple weighted average life of a bond and duration of a bond is: A.the timing of interest payments. B.that duration involves the present value of individual cash flows. C.that duration involves the using of the stated value of individual cash flows. D.None of the above

Q: Duration will not help international bond managers choose bonds for their portfolios because of the foreign exchange risk.

Q: Terminal wealth analysis is one way of analyzing the effect of the reinvestment rate risk.

Q: Duration is: A.always longer than maturity. B.always the same as maturity. C.normally shorter than maturity. D.always shorter than maturity.

Q: Macaulay duration is a bond's weighted average life based on present value of cash flows.

Q: Duration is a useful number because it combines the effects of maturity, coupon, and market rates to indicate how the price of the bond will change with a change in interest rates.

Q: Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.

Q: Weighted average life is the most representative value for effective bond life.

Q: A zero-coupon bond has a duration equal to its maturity.

Q: There is an inverse relationship between interest rates and bond values, and between the amount of coupon payments and weighted average life.

Q: Terminal wealth analysis is the process of measuring the effects of shifting market rates on bond prices.

Q: An investment has the following range of outcomes and probabilities.Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary).Expected value = 7.75Standard deviation = 2.59

Q: Duration analysis is subject to the assumption that all interest income can be reinvested at the market rate of interest.

Q: Using the formula for the security market line (Formula 21-7), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, and the beta (bi) is 1.2, compute the anticipated return for stock i (Ki).A.20.4%B.16.33%C.13.64%D.13.4%E.13.2%

Q: Using the formula for the capital market line (Formula 21-5), if the risk-free rate (RF) is 6%, the market rate of return (KM) is 12%, the market standard deviation (M) is 11%, and the standard deviation of the portfolio (P) is 14%, compute the anticipated return of the portfolio (KP).A.20.4%B.16.33%C.13.64%D.13.4%E.13.2%

Q: Immunization protects the portfolio value against upward movement in interest rates but not downward movement in interest rates.

Q: A stock with a beta of 1.9 would be most likely to be found in what industry? (Use your best judgment.)A.AirlinesB.Grocery storesC.Public utilitiesD.Insurance

Q: Which of the following are assumptions of the capital asset pricing model?A.Funds can be borrowed or lent in unlimited quantities at risk-free rateB.The objective of all investors is to maximize their expected utility over the same one-period time frame using the same basis for evaluating investmentsC.There are no taxes or transaction costs associated with any investmentD.All of the above are correct assumptions

Q: Immunization is the process of measuring bond price sensitivity to interest rate changes.

Q: If the market rate of return is 10% and the beta on a particular stock is .78, the return on the stock will be:A.greater than 10%.B.greater or less than 10%, depending on the risk-free rate of return.C.less than 10%.D.dependent on some other factor.

Q: The risk that is assumed to be rewarded for an individual stock under the capital asset pricing model is measured by the:A.portfolio standard deviation.B.portfolio beta.C.individual stock's standard deviation.D.individual stock's beta.

Q: The duration of a 20-year zero-coupon bond is equal to the maturity, regardless of the market rate.

Q: The duration of a ten-year, 10%, $1,000 bond at a market rate of 6% is exactly equal to the duration of the same bond at a 14% market rate.

Q: If the _____ of any individual stock is known, an investor can use the _____ to determine the expected rate of return on that stock.A.Beta; capital market lineB.Beta; security market lineC.Standard deviation; capital market lineD.None of the above

Q: If you took all the possible investments that investors could acquire and determined the optimum basket of investments, you would come up with point _________ on the capital market line.A.RFB.KC.MD.Z