ACST101 Lecture Notes - Lecture 6: Premium Bond, Cash Flow, Interest Rate Risk

87 views6 pages

orchidgiraffe317

29 Jun 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

ACST101 LECTURE 5/4/18

WK 6; BONDS

BONDS

- A form of security, an ‘IOW’, a loan

- A financial security is an obligation that gets traded – bonds

- ‘Secondary Markets’ where people on sell these bonds after the primary transaction

- Cash Flows/’PMTs’ are known as ‘coupons’ in bonds

INTRINSIC VALUES

Market Efficiency

- If markets are efficient, investors and financial managers can believe securities are

prices at or near true value

- The more efficient a security market, the more likely securities are prices at or near

true value

- Overall efficiency of a capital market depends on its operational and informational

efficiency

- Operational efficiency focuses on bringing buyers and sellers together at lowest

possible cost

- Markets exhibit informational efficiency if market prices reflect all relevant

information about securities at particular points in time

- In an efficient market, market prices adjust quickly to new information about a

security as it becomes available

- Competition among investors is an important driver of informational efficiency

- Market efficiency can be explained at three form levels;

oStrong

oSemi-Strong

oWeak

Efficient Market Hypothesis (EMH)

Strong: All information about a security is impounded in its price

Semi-Strong: All public information about a security is impounded in its price

Weak: All information about a security contained in its past prices is impounded in its

current price but there is current public and private information that is not

BOND MARKETS

1. Government Bonds (Aus./State Government)

2. Corporate Bonds (BHB, ANZ)

Markets for Corporate Bonds

- Largest investors are super funds, investment funds and life insurance companies

- Trades are in very large blocks of securities

- Most secondary market corporate bond transactions take place through dealers in

the over-the-counter (OTC) market

- Little transparency. Little centralised reporting

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

BOND FEATURES

- Bonds are simply long-term IOU’s that represent claims against a firm’s assets

- Bonds are a form of debt instrument

oThe term ‘financial instruments’ refers to agreements that evidence financial

obligations. It is a wider term than ‘financial securities’ as securities suggest

the instrument can be traded

- Bonds are often referred to as fixed-income investments or fixed income securities

- Three types of corporate bonds are; coupon bonds, zero coupon bonds, and

convertible bonds

-Bond; a bond represents a loan made by investors to the issuer

- In return for his/her money, the investor receives a legal claim on future cash flows

of the borrower. The issuer promises to;

oMake regular coupon payments every period until the bond matures, and,

oPay the face/par/maturity value of the bond when t matures

- Default; since the above-mentioned promises are contractual obligation, an issuer

who fails to keep them is subject to legal action on behalf of the lenders

(bondholders).

-Par Value; face value amount of the bond, which is paid at maturity (assume $1000 –

can be $100)

-Coupon Rate; stated interest rate (generally fixed) paid by the issuer. Multiply by par

to get dollar payment of interest per year

-Maturity Date; when the bond must be repaid

-Yield to Maturity (YTM); rate of return earned on a bond held until maturity. (Seen

as an ‘internal rate of return’ in that it is the rate at which the cash flows from

holding the bond, are discounted to equal the bond price)

TYPES OF CORPORATE BONDS

Coupon Bonds

- These bonds have coupon payments fixed for life of bond, and at maturity, principal

is paid, and bonds are retired

- Coupon bonds have no special provisions; provisions they do have are conventional

and common to most bonds

- Payments usually made annually or semi-annually

Zero Coupon Bonds

- Companies sometimes issue bonds with no coupon payments, only offering one

payment at maturity

- Zero coupon bonds sell well below their face value (at deep discount) because they

offer no coupons – not frequently issues in Australia

Convertible Bonds

- Bonds that can be converted into ordinary shares at pre-determined ratio at

discretion of bondholder

- Convertible feature allows bondholders to share company’s good fortunes if the

company’s shares rise above certain level NOT RELEVANT TO ACST101

find more resources at oneclass.com

Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

Document Summary

A form of security, an iow", a loan. A financial security is an obligation that gets traded bonds. Secondary markets" where people on sell these bonds after the primary transaction. Cash flows/"pmts" are known as coupons" in bonds. If markets are efficient, investors and financial managers can believe securities are prices at or near true value. The more efficient a security market, the more likely securities are prices at or near true value. Overall efficiency of a capital market depends on its operational and informational efficiency. Operational efficiency focuses on bringing buyers and sellers together at lowest possible cost. Markets exhibit informational efficiency if market prices reflect all relevant information about securities at particular points in time. In an efficient market, market prices adjust quickly to new information about a security as it becomes available. Competition among investors is an important driver of informational efficiency. Market efficiency can be explained at three form levels: strong, semi-strong, weak.

Related Questions

1. Which of the following statements about the OTC market istrue?

A. An OTC market is an organized exchange where there is acentral trading location.

B.	OTC security transactions are made on the floor of an exchangeby traders.

C.	Securities that are not listed on an organized exchange arebought and sold on the OTC market.

D.	Securities that are listed on an organized exchange are boughtand sold in the OTC market.

2. Which of the following theories states that security pricesreflect all information, whether public or private?

A. Weak-form efficiency.

B.	Semistrong-form efficiency.

C.	Nominal-form efficiency.

D.	Strong-form efficiency.

3. Which of the following is a primary investment vehicle forthe funds in which life insurance companies must invest?

A.Both equity securities and long-term corporate bonds.

CDs.

C.	Equity securities.

D.	Long-term corporate bonds.

4. Large firms are most likely to use money markets for thefollowing reason:

A. To make long term investments.

B.	To buy commercial paper at lower interest rates than it couldsell through a bank.

C.	To finance long term investments.

D.	To adjust their liquidity position.

5. Which of the following is true of the New York StockExchange?

A. It is an organized exchange.

B.	It has no central trading location.

C.	It is an over-the-counter exchange.

D.	It can be used by all U.S citizens.

6. Which of the following is true of an efficient market?

A. Market prices of securities of companies in the same industryare all same.

B.	Market prices adjust quickly to new information as it becomesavailable.

C. All information contained in past prices of a security isreflected in its current price but that there is both public andprivate information that is not.

D.	Securities have no systematic risk.

tealgoose402

Question 1

Financial investments are made in efficient markets. The existence of these markets suggests that:

	a.	Investors cannot earn superior returns.
	b.	Investors cannot expect to outperform the market consistently.
	c.	Security prices are random.
	d.	Bearing additional risk will not increase return.

2 points

Question 2

A new issue of corporate securities sold to the general public must be:

	a.	Registered with the SEC.
	b.	Initially sold through brokers.
	c.	Offered initially to existing stockholders.

2 points

Question 3

Money market mutual funds invest in which of the following?

Commercial paper.

Repurchase agreements.

Corporate bonds.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of the choices are correct.

3 points

Question 4

FDIC insures:

	a.	U.S. Treasury bills.
	b.	Money market mutual funds.
	c.	Saving accounts.
	d.	Repurchase agreements.

3 points

Question 5

Which of the following does not have default risk?

	a.	Money market mutual funds.
	b.	Commercial paper.
	c.	Negotiable certificates of deposit.
	d.	U.S. Treasury bills.

2 points

Question 6

The spread is the:

	a.	Difference between the bid and ask prices.
	b.	Commission charged by the broker.
	c.	Difference between the purchase and sale prices.
	d.	Difference between the commissions charged by full-service and discount brokers.

3 points

Question 7

Securities regulations protect investors by:

	a.	Requiring disclosures of information by firms.
	b.	Stopping investors from buying overpriced stock.
	c.	Reducing competition among brokers.
	d.	Establishing commission schedules.

3 points

Question 8

If a stock is bought on margin:

	a.	The full amount of the cost of the investment is borrowed.
	b.	The commissions on the investment are increased.
	c.	The cost of the investment is reduced.
	d.	The interest on the borrowed funds is set by the SEC.

3 points

Question 9

Sarbanes-Oxley, the latest important securities law:

	a.	Reduces potential conflicts between securities analysts and investment bankers.
	b.	Legalizes the sale of securities by investment brokers.
	c.	Requires corporate boards of directors to own stock.
	d.	Mandates that security analysts file their recommendations with the SEC.

2 points

Question 10

Which of the following are true about the present value of a dollar?

It increases as the interest rate increases.

It decreases as the interest rate increases.

It increases as the time period increases.

It decreases as the time period increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 11

Time value concepts may not be used to determine:

	a.	The present value of an annuity.
	b.	The margin required on a stock purchase.
	c.	The future value of $100 deposited in a bank.
	d.	The present value of a lump sum.

2 points

Question 12

What is the marginal tax rate?

	a.	The tax rate paid on investment gains from items purchased on margin.
	b.	The tax rate paid on an additional dollar of taxable income.
	c.	The margin required on a stock purchase.
	d.	The present value of a lump sum.

2 points

Question 13

Examples of capital gains include sales of which of the following?

IRA accounts.

Stocks sold for a profit.

Real estate sold for a profit.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 14

With a Roth IRA, the individual:

	a.	May deduct annual contributions.
	b.	Earns tax-free income.
	c.	Defers taxes.
	d.	Avoids estate taxes.

2 points

Question 15

Sources of unsystematic risk include which of the following?

A firms financing decisions.

A firms operations.

Fluctuating market prices.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

2 points

Question 16

For diversification to reduce risk:

	a.	The returns on the individual securities should be highly correlated.
	b.	The prices of the stocks should be stable.
	c.	The returns on the individual securities should be negatively correlated.
	d.	One firm should offer dividends and the other should offer capital gains.

2 points

Question 17

Which of the following are true about beta coefficients?

They are a measure of systematic risk.

They relate the return on an individual security to the return on the market.

They measure the variability of an assets return.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 18

Which of the following does an efficient portfolio do?

Maximizes risk for a given return.

Minimizes risk for a given return.

Maximizes return for a given level of risk.

Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

Which of the following will tend to cause a stock's price to fall?

The firms beta declines.

The firms beta increases.

The risk-free rate declines.

The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

What does the efficient market hypothesis require?

Financial markets to be competitive.

Prices to adjust rapidly.

Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

Which of the following does the strong form of the efficient market hypothesis suggest?

Inside information will not lead to superior investment results.

Inside information will lead to superior investment results.

Studying financial statements will not lead to superior investment results.

Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

Dividend reinvestment plans offer which of the following advantages?

Deferment of federal income taxes.

A convenient means to accumulate shares.

Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

Which of the following are true as the debt ratio increases?

Fewer assets are debt financed.

More assets are debt financed.

The ratio of debt equity increases.

The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

ceruleanelephant209

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

1. The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

ultramarineguinea-pig196

ACST101 Lecture Notes - Lecture 6: Premium Bond, Cash Flow, Interest Rate Risk

Document Summary

Get access

Related Documents

ACST101 Lecture Notes - Lecture 7: Dividend Discount Model, Common Stock, Preferred Stock

ACST101 Study Guide - Final Guide: Weighted Arithmetic Mean, Callable Bond, Capital Budgeting

FINC-UB 2 Chapter Notes - Chapter 8: Efficient-Market Hypothesis, Economic Equilibrium, Capital Market

Related Questions