Please answer all questions in Parts 1 and 2. And show all calculations where necessary.
Part 1
1) A _______ ________ investor is one who does not like risk and uncertainty.
2) Investing in two or more assets whose returns do not always move in the same direction at the same time is referred to as portfolio ______________.
3) Portfolios that are not well diversified are exposed to
a) Market Risk
b) Systematic Risk
c) Conversion Risk
d) Unsystematic Risk
4) The market’s influence on an individual stock is quantified in the stock’s
a) Alpha Factor
b) Stock Price
c) Dividend Yield
d) Beta Factor
5) Bond covenants that allow the bond issuer to buy back bonds on demand are referred to as _________ provisions.
6) A Discount Bond is a bond whose coupon rate is greater than the market rate. True or False?
7) As interest rates decline, the price of a bond __________.
8) For the same change in interest rates, short term bond prices will change more than long term bond prices. True or False?
9) Which of the following instruments would have the lowest level of default risk;
a) Municipal Bonds
b) Equities
c) Treasury Bills
d) Convertible Bonds
10) The difference between a bond’s stated interest rate and the market risk free interest rate is called the;
a) Nominal Rate
b) Conversion Discount
c) Risk Premium
d) Call Factor
Part 2
1) You have the opportunity to purchase a four-year bond with a face value of $1,000 that pays 5% annual interest. How much should you pay for the bond if the current market rate of interest is 7%? Show your calculation/inputs.
2) List and describe the three Bond Theorems.
3) What would be the price of a $1,000 face value three-year bond with a coupon rate of 5%, paid semi-annually, providing a market yield of 8%? Show your calculations/inputs.