David Garcia, CFA, is analyzing two bonds. Bond X is an option tree corporate security with a 7% annual coupon and ten years to maturity. Bond Y is a mortgage backed security that also matures in ten years. Garcia is considering two possible interest rate scenarios--one in which rates are flat over the entire 10year horizon, and one in which the yield curve is sloped steeply upwards. For each bond, Garcia has calculated the nominal spread over the 10-year U.S. Treasury issue as well as the zero-volatility spread. The zero-volatility spread would differ the most from the nominal spread:
A. for Bond X, when the yield curve is sloped steeply upwards
B. for Bond Y, when the yield curve is sloped steeply upwards
C. for Bond X, when the yield curve is flat
The bonds of Joslin Corp. are currently callable at par value. The bonds mature in eight years and have a coupon of 8%. The yield on the Joslin bonds is 175 basis points over 8-year U.S. Treasury securities, and the Treasury spot yield curve has a normal, rising shape. As yields on bonds comparable to the Joslin bonds decrease, the Joslin bonds will most likely exhibit:
A. negative convexity
B. increasing modified duration
C. increasing effective duration
Donald McKay, CFA, is analyzing a client's fixed income portfolio. As of the end of the last quarter, the portfolio had a market value of $7,545,000 and a portfolio duration of 6.24. McKay is predicting that the yield for ali of the securities in the portfolio will decline by 25 basis points next quarter. Which of the following statements regarding the portfolio's performance next quarter is most accurate?
A. For the expected change in portfolio yield next quarter, the market value of the portfolio will change by approximately 6.24%.
B. If the yield curve has a 50 basis point downward parallel shift next quarter, the portfolio will increase in value by approximately $235,404.
C. The portfolio's ending value after the expected decline in yields will be approximately $7,427,298.
An analyst develops the following information to value a common stock.
The analyst estimates the required rate of return and uses a DDM to value the shares. The value per share
is closest to:
A. $14.39
B. $21.28
C. $31.39
Jack Saunders is analyzing Barco Incorporated, an industrial conglomerate company. Saunders is estimating the intrinsic value for Barco Incorporated by forecasting the company's earnings per share and earnings multiplier. Which of the following attributes of Barco is least likely to increase the company's earnings multiplier?
A. Barco Incorporated has never had a restructuring charge in its history.
B. Barco Incorporated^ earnings move in tandem with overall economic growth.
C. Barco Incorporated's dividend has been increasing for the last 30 years.
Brad Kit, CFA, is analyzing the broadcasting industry. Kit has narrowed his analysis to Willow Corp. and Vision Inc. Willow Corp. is a media company with a diversified group of leading TV, newspaper, and cable news operations. Revenues and earnings have grown slightly over the past ten years. The company's long-term debt to capital ratio is 40%. During the last recession, the company's earnings remained flat with the prior year. Still, Kit believes that Willow Corp. will have positive earnings surprises over the next several quarters, due to several new programs that have been hugely successful. Vision Inc.'s operations are located in emerging markets with a high degree of political and regulatory risk. However, the TV, radio, and internet operations have the potential for extraordinary returns. Vision's stock is trading at 30 times next year's earnings and five times book value. A client asks Kit whether Willow Corp. is a growth company or growth stock and whether Vision Inc. is a speculative company or speculative stock. Kit's most appropriate response would be that:
A. Willow Corp. is a growth stock and Vision Inc. is a speculative stock.
B. Willow Corp. is a growth company and Vision Inc. is a speculative stock.
C. Willow Corp. is a growth stock and Vision Inc. is a speculative company.
The following information is provided about Jacko Industries.
Using the method of average return on equity, Jacko's P/E ratio is closest to:
A. 10.0
B. 16.67
C. 20.0
An analyst has stated that, holding all else constant, an increase in the maturity of a coupon bond will increase its interest rate risk, and that a decrease in the coupon rate of a coupon bond will decrease its interest rate risk. The analyst is correct:
A. only with respect to the effect of the increase in the maturity
B. only with respect to the effect of the decrease in the coupon rate
C. with respect to both the effect of the increase in maturity and the effect of the decrease in the coupon rate
An analyst has been researching a possible investment in collateralized debt obligations (CDOs). Identify the statement which is most likely correct.
A. The underlying securities for a CDO are typically issued only by U.S.-based entities.
B. A CDO with corporate bonds as the underlying security is known as a collateralized loan obligation (CLO).
C. A CDO is typically structured into tranches, similar to a collateralized mortgage obligation (CMO).
Chris South owns $25,000 face value of Bradco bonds, which have a 7% coupon, pay interest semiannually, and have six years remaining until maturity. The bonds are callable at par. The bonds were rated A when Chris bought them at par two years ago, and they are currently worth $26,225, with a rating of AA. Which of the following statements most accurately describes the change in the risk of the Bradco bonds?
A. Call risk has decreased.
B. Liquidity risk has increased.
C. Credit risk has decreased.
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