THEME 1:
Question 1. Explain how changes in debt-equity ratio impact the beta of the firm's equity. Provide a mathematical example to support your analysis.
Question 2. What are the ramifications of a firm having a "less than optimal" or "wrong" capital structure?
THEME 2:
Question 1. In describing an optimal investment portfolio for someone who is 22 years of age, what would you recommend to them with respect to their distribution of stocks and bonds? Would your recommendation change if the person were 45 years old? Would it change if they were 85 years old?
Question 2. If you were going to assess the riskiness of bonds, what types of characteristics (variables) would you consider? For example, "time" would be a variable (long vs. short-term bonds). Which of the variables that you have listed would be the most important? How would you rank order your considerations?
Question 3. Using the Internet, find an example of how bonds' returns demonstrate the "term structure of interest rates."
Question 4. Why do bonds of different maturities have different yields in terms of the expectations, liquidity, and segmentation hypotheses? Describe how these hypotheses relate to two different situations: 1) when the yield curve is upward sloping; 2) when the yield curve is downward sloping.