Q&A Hero

Q: How is the value of a bond determined? a) The present value of the bond's future cash flows is discounted by one or more appropriate rate(s). b) The perpetuity model is used to determine the value of a bond. c) The present value of the company's future cash flows is discounted by one or more appropriate rate(s). d) The constant growth dividend model is often used to value bonds.

Q: What happens to the price of bonds, if interest rates go up? a) The price of bonds goes up. b) The price of bonds stays the same. c) The price of bonds goes down. d) The relationship between interest rates and bond prices cannot be determined.

Q: Now let's look from the view of the investor who buys an 8 percent semiannual bond with 8 years remaining to maturity, when market rates are 6%. If this investor pays $1,125.44 for the bond, what is his current yield? a) 3.55 percent b) 7.11 percent c) 8.00 percent d) 10.00 percent

Q: Assume an investor buys a newly issued 8 percent, semi-annual 10 year bond at par. He sells it two years later, when market interest rates have decreased to 6 percent. How much is the investor's capital gain or loss? a) $1,000 gain b) $1,125.44 gain c) $125.44 gain d) $377.00 loss

Q: Which of the following typically contributes the greatest portion to the Total Dollar Return? a) The semi-annual coupon payments b) The interest earned on reinvesting the coupon payments. c) The principal paid at maturity. d) The interest earned on reinvesting the principal.

Q: What is the difference between the Yield-to-Maturity and the Realized Compound Yield? a) They are actually the same concept. b) The yield to maturity is the actual return, calculated at the end of the investment; the realized compound yield is the expected return at the beginning of the investment. c) The realized compound yield is the actual return, calculated at the end of the investment; the yield to maturity is the expected return at the beginning of the investment. d) The yield to maturity continues as far as the first call, the realized compound yield continues until final payment is made.

Q: Which of the following is the best definition of "realized compound yield"? a) The yield an investor realizes on the bond coupons. b) The total amount of the coupon and principal payments. c) The ending wealth divided by the starting wealth. d) The total amount of the coupon and principal payments, and the reinvestment of these flows.

Q: Which of the following is a situation in which an investor will NOT receive the promised yield to maturity? a) The investor holds the bond until maturity, and reinvests coupon payment at the original yield to maturity. b) Interest rates do not change during the life of the bond. c) The issuer calls the bond prior to original maturity. d) The realized compound yield is equal to the promised yield to maturity.

Q: What is meant by "Yield to Maturity"? a) The coupon interest rate paid each year, divided by the face value of the bond. b) The coupon interest rate paid each, divided by the current price of the bond. c) The periodic interest rate that equates the current price with the expected future flows. d) The periodic interest rate that equates the current price with the expected future flows, up to the time of the first call.

Q: For most long term bonds, when coupons are reinvested, what is the most important component of the bond's total return? a) Coupon rate. b) Interest-on-interest. c) Yield to Maturity d) Interest-on-principal.

Q: An investor has three sources of dollar returns from a bond investment. Which of the following is NOT included among the three sources? a) The semi-annual coupon payments. b) The interest earned on reinvesting the coupon payments. c) The principal paid at maturity. d) The interest earned on reinvesting the last coupon and the principal.

Q: What is meant by the real risk-free rate of interest? a) The opportunity cost of foregoing consumption, representing the rate that must be offered to individuals to persuade them to save rather than consume. b) The rate actually used in the market, not in textbooks. c) The rate quoted on short-term Treasury bills. d) The nominal risk-free interest rate, less the expected inflation.

Q: Which of the following bonds will be most sensitive to changes in market interest rates? a) 8 percent semiannual coupon with 8 years to maturity. b) 6 percent semiannual coupon with 8 years to maturity. c) 8 percent semiannual coupon with 6 years to maturity. d) 6 percent semiannual coupon with 6 years to maturity.

Q: Examine Example 17-13. The basic data is repeated here, in financial calculator format: FV = 1000, N=30, PMT=50 I/Y Price=PV % change At 10% $1,000.00 At 8% $1,172.93 +17.29 % At 12% $ 862.35 -13.77 % Why are the % changes different? a) They are actually the same: the table includes an error. b) The prices shown are rounded to the nearest penny, slightly moving the % changes. c) The relationship between interest rates and price is not linear. d) Other factors, including duration and coupon rate, will also affect the relationship between interest rates and prices.

Q: Which of the following is NOT one of the factors used in calculating duration? a) The final maturity of the bond. b) The coupon payment. c) The yield to maturity. d) The current price.

Q: Why is duration important for investing in bonds? a) Investors need to know the relationship between interest rates and prices. b) Investors need to know the "average" maturity of the bonds they are considering. c) Investors need to know the coupon rates of the bonds they are considering. d) Investors need to know the yield to maturity.

Q: Which of the following is NOT a true statement? a) Duration measures the time until the principal is repaid. b) Duration is the weighted average of the timing of the bond's payments. c) The weights in the calculation of duration are the present value of each payment, divided by the value of the bond. d) Modified duration measures the sensitivity of the bond's price to interest rate changes.

Q: Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends), and the repayment of principal (or sale of the stock).

Q: The vast majority of corporate bonds pay floating rate interest on a quarterly basis.

Q: A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.

Q: Bond traders use the term "basis point" to mean one percentage point in interest rate.

Q: Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.

Q: The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.

Q: If interest rates rise, then price risk and reinvestment risk decline.

Q: As interest rates increase, long bonds will decrease in price more slowly than shorter bonds.

Q: Three theories have been proposed to explain the term structure of interest rates. They are: ________________________, ______________________, and ____________________.

Q: Risk premiums, or yield spreads, refer to the issue characteristics of bonds. They are the result of 7 factors. Listing them, they are differences in: 1) ___________________________________________ 2) ___________________________________________ 3) ___________________________________________ 4) ___________________________________________ 5) ___________________________________________ 6) ___________________________________________ 7) ___________________________________________

Q: Yield spreads vary inversely with the: ______________________________.

Q: Correct bond calculations in the United States usually involve semiannual periods because bond interest is typically paid twice a year. n ct FVP = ∑ ------------ + ------------ t=1 (1 + ytm)t (1 + ytm)n where P = the current market price of the bondn= the number of semiannual periods to maturity ytm = the semiannual yield to maturity to be solved for c = the semiannual coupon in dollars FV = the face value (or maturity value or par value) which in this discussion is always $1,000 What does this formula imply about the term structure of interest rates? How would real-world bond investors price bonds to correct for this?

Q: A period of correction is often followed by a period of ________.a. channel lines.b. momentum.c. reversals.d. consolidation.

Q: One rule of thumb is that a stock is attractive when the relative strength has improved for at least ---------------months.a. 1b. 2c. 3d. 4

Q: Volume and specific calendar time are not considered important in a:a. Logarithmic price and volume chart.b. Point and figure chartc. Nominal price and volume chart.d. Moving average convergence and divergence chart.

Q: Which of the following is true regarding the resistance level?a. Resistance levels tend to develop due to profit taking.b. It is the level at which a significant decrease in demand is expected.c. It is the level at which a significant increase in supply is expected.d. Resistance levels usually develop after a stock reaches a new low.

Q: One of the primary tools of a technical analyst is:a. sell-side research.b. buy-side research.c. Value Line earnings estimates.d. chart of stock price and volume.

Q: In order to have confirmation of a major market trend under the Dow Theory, the:a. industrial and utility averages must confirm each other.b. transportation and utility averages must confirm each. other.c. utility average must lead the transportation average.d. transportation and industrial average must confirm each other.

Q: Which of the following is not one of the three major variables to be decided by the investor in order to construct a moving average?a. price.b. time period.c. weight to be used.d. type of moving average to be constructed.

Q: A support level is a price range:a. at which a significant increase in demand for a stock is expected.b. at which a significant increase in supply of a stock is expected.c. below which a stock price cannot go.d. above which a stock price cannot go.

Q: Which of the following is not true regarding the Dow Theory? a. It is intended to forecast the start of a primary movement.b. It does not forecast how long a movement will last.c. It has a very high success rate.d. It is subject to many criticisms.

Q: Technical analysis differs from fundamental analysis in that technical analysis:is aimed at the market while fundamental analysis is aimed at individual stocks.is based on published market data and focuses on internal factors.focuses on the long-term trends of production.does not consider price and volume.

Q: Technical analysis differs from fundamental analysis in that technical analysis:a. is aimed at the market while fundamental analysis is aimed at individual stocks.b. is based on published market data and focuses on internal factors.c. focuses on the long-term trends of production.d. does not consider price and volume.

Q: What do technical analysts believe is the best source of data to use in analyzing stocks?:a. Corporate earnings growth prospects.b. Insider buying and selling of shares.c. Current P/E ratios versus historical ratios.d. The market itself.

Q: Technical analysis is sometimes called market or ________ analysis.a. external.b. internal.c. stochastic.d. qualitative.

Q: The two primary tools of a technical analyst are:a. level of the market index and volume.b. economic indicators and level of the market index.c. price and earnings. d. price and volume.

Q: Technical analysis reflects the idea that stock prices:a. move upward over time.b. move inversely over time.c. move in trends.d. move randomly.

Q: How can relative strength analysis be helpful in a top-down approach to security analysis?

Q: Which forms of the Efficient Market Hypothesis addresses the information used in technical and fundamental analysis? Do studies of technical analysis methods tend to support or refute the EMH?

Q: Discuss the difference in beliefs about price adjustments toward equilibrium in technical analysis and the Efficient Market Hypothesis.

Q: What is the advance-decline line? What does it tell the technician?

Q: What four factors should be considered in testing technical trading rules?

Q: Institutional investors are often considered to have the 'smart money,' while small, individual investors are not so well informed about the market. Which two sentiment indicators treat both institutions and individuals alike?

Q: Investors who sell short expect to make money when the stock price goes down. How, then, can a high short-interest ratio be considered bullish?

Q: How is relative strength calculated and used?

Q: Explain three specific buy signals using a moving average.

Q: What are support and resistance levels?

Q: How does a point-and-figure chart compress many price changes into a small space?

Q: Explain how profit taking and support levels are related.

Q: In the 1990s, many investment firms hired large numbers of fundamental analysts and very few technical analysts. Following the market downturns of 2000 and 2001, investment firms realized their mistake and hired far more technical analysts than fundamental analysts.

Q: A filter rule specifies a breakpoint for a stock or average and trades are made when the price is greater than the filter.

Q: A put/call ratio greater than the typical upper limit would be interpreted as a bullish signal by the contrarians.

Q: The cash position of mutual funds is a contrarian indicator.

Q: Secondary movements are often termed technical corrections.

Q: If a trend exhibits support and resistance levels simultaneously that appear well defined, the trendlines are referred to as channel lines.

Q: Relative strength analysis is popular because it is generally not subject to conflicting interpretations.

Q: A bar chart is the simplest type of chart used in technical analysis.

Q: The bearish-sentiment index is calculated as the ratio of advisory services that are bearish to the total number with an opinion.

Q: The Dow theory is intended to forecast the start but not the duration of a primary movement.

Q: Technical analysts agree with the fundamental analysts regarding the usefulness of accounting data.

Q: Technical analysis focuses on timing and on the short run.

Q: Technical analysis utilizes a top-down, fundamental approach to common stocks.

Q: Some recent research shows technical analysis may have some value. For example, Brown and Jennings (1989) show investors can learn something about other investors by observing prices at which securities trade ' i.e., prices reveal information and convey it. What other kinds of today's models open up the possibility of profitable trading strategies using technical analysis? a. Arbitrage. b. Trading Rules. c. Short-interest. d. Behavioral.

Q: Fama and Blume (1969) tested 24 filters ranging from 0.50% to 50% on each of the 30 DJIA stocks. Among the tested filters: a. several were profitable before commissions but not after. b. several were profitable before and after commissions. c. none were profitable even before commissions. d. all were profitable before commissions but not after.

Q: Small changes in the put/call ratio are considered unimportant, whereas extreme changes convey information. Two rules of thumb are that a ratio greater than _________ based on a 10-day moving average would be excessively bearish and thus a buy signal, and a ratio of less than _____________ would be excessively bullish, and therefore a sell signal. a. 0.70, 0.65 b. 0.80, 0.45 c. 0.90, 0.25 d. 0.95, 0.05

Q: Conclusions about technical analysis suggest that:a. it is Difficult to justify technical analysis.b. it has been found to be completely deficient.c. stock price movements repeat themselves constantly.d. there is complete agreement about the interpretation of technical signals.

Q: If a trading rule has been tried on data other than that used to produce the rule and found to be accurate, this is known as: a. consistency. b. relative strength. c. out-of-sample validity. d. a filter rule.

Q: If an investor buys a stock when its price has increased 15 percent from its previous low, the investor is employing: a. a contrarian indicator. b. a filter rule. c. a sentiment indicator. d. relative strength analysis.

Q: Which of the following is not one of the tests of a technical trading rule? a. Transaction and other costs b. Consistency c. Return d. Risk

Q: Which of the following indicates the market is at its peak, according to contrarians? a. the short-interest ratio is low b. the bearish sentiment index is around 20 percent c. mutual fund liquidity is low d. all of the above would indicate a market peak to a contrarian

Q: Which of the following would be considered a strong bearish signal?a. High mutual fund liquidityb. Bullish advisory opinionc. Low short interest ratiod. Bearish advisory opinion

Q: Technicians that utilize the CBOE put/call ratio generally believe:a. option investors are almost consistent losers.b. option investors are almost consistent winners.c. option investors are true technicians.d. option investors possess inside information.

Q: A put/call ratio of .70 indicates:a. puts have a cost 70% less than the cost of calls.b. there are 7 puts purchased for every one call purchased.c. there are 70% more puts purchased than calls.d. there are 7 puts purchased for every 10 calls purchased.