1. Which of the following is the closest reason why technical analysis is a controversial subject in academia?
a. Technical analysis is base on cash flow valuation methods.
b. Using technical analysis, the future price is known with certainty.
c. Technicians always base their decision on contrary indicators.
d. According to the efficient market hypothesis, if the market is efficient, the study of past price movements cannot be used to forecast future price movements in stocks.
2. When you buy an individual bond, you derive income from different sources. They are:
a. All of the above
b. Simple interest
c. Interest on interest
d. Return of principal at maturity, or proceeds from the sale of the bond prior to maturity
3. While all bonds are subject to interest rate risk, that risk is correlated to maturity length. As maturity length increases, so do potential price fluctuations. Conversely, the _____ the maturity of the bond you buy, the _____ the risk of price fluctuations as a result of changes in interest rate levels.
a. shorter; higher
b. shorter; lower
c. none of the above
d. longer; lower
4. Assume that you own a 2-year, 10-year and 30-year bond (years to maturity) and all of the same quality. All have the same coupon rate = 7%. The only difference in the bonds is in the years to maturity. Further assume that required YTM on all of these bonds increases by 2 percent and that you observe the following changes in prices on these bonds:
-3.6%
-20.6%
-13.0%
Without using a calculator, which bond's price changed by -20.6%?
a. 2-year bond
b. none of the above because prices should have risen and not fallen.
c. 10-year bond
d. 30-year bond