Questions and Answers of Accounting For Investments

IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?a. Credit risk premiums may be useful to IAAI because they
Which of the domestic series that the IAAI research department listed for use as leading indicators is least appropriate?a. Industrial production.b. Average weekly hours in manufacturing.c. The S&P
Stock prices are useful as a leading indicator. To explain this phenomenon, which of the following is most accurate? Stock prices:a. Predict future interest rates as well as trends in other
IAAI foresees positive trends for both job creation and consumer confidence. Which, if either, of these trends should have a positive effect on stock prices? P-968
Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.a. What are expected profits
General Weedkillers dominates the chemical weed control market with its patented product Weed-ex. The patent is about to expire, however. What are your forecasts for changes in the industry?
Why do you think the change in the index of labor cost per unit of output is a useful lagging indicator of the macroeconomy? (See Table 17.2.) P-968
Why do you think the index of consumer expectations for business conditions is a useful leading indicator of the macroeconomy? (See Table 17.2.) P-968
For each pair of firms, choose the one that you think would be more sensitive to the business cycle. P-968a. General Autos or General Pharmaceuticals.b. Friendly Airlines or Happy Cinemas.
In which stage of the industry life cycle would you place the following industries? (Note: There is considerable room for disagreement concerning the “correct” answers to this question.) P-968a.
Here are four industries and four forecasts for the macroeconomy. Match the industry to the scenario in which it is likely to be the best performer. P-968
Consider two firms producing smartphones. One uses a highly automated robotics process, whereas the other uses workers on an assembly line and pays overtime when there is heavy production demand.
Which of the following is not a governmental structural policy that supply-side economists believe would promote long-term growth in an economy? P-968a. A redistributive tax system.b. A promotion of
Which of the following forecasts is consistent with a steeply upwardly sloping yield curve?a. Monetary policy will be expansive and fiscal policy will be expansive.b. Monetary policy will be
According to supply-side economists, what will be the long-run impact on prices of a reduction in income tax rates? P-968
Unlike other investors, you believe the Fed is going to loosen monetary policy. What would be your recommendations about investments in the following industries? P-968a. Gold miningb. Construction
What characteristics will give firms greater sensitivity to business cycles? P-968
What are the differences between bottom-up and top-down approaches to security valuation?What are the advantages of a top-down approach? P-968
Choose an industry and identify the factors that will determine its performance in the next three years. What is your forecast for performance in that time period? P-968
If you believe the U.S. dollar will depreciate more dramatically than other investors anticipate, what will be your stance on investments in U.S. auto producers? P-968
What monetary and fiscal policies might be prescribed for an economy in a deep recession? P-968
Industries generally pass through a predictable life cycle. In the start-up stage, growth is rapid as a new product begins to permeate the economy, but it is difficult at this point to predict which
Industries differ in their sensitivity to the business cycle. More sensitive industries tend to be those producing high-priced durable goods for which the consumer has considerable discretion as to
The business cycle is the economy’s recurring pattern of expansions and recessions. Leading economic indicators can be used to anticipate the evolution of the business cycle because their values
The traditional tools of macroeconomic policy are government spending and tax collection, which constitute fiscal policy, and manipulation of the money supply via monetary policy. Expansionary fiscal
Macroeconomic policy aims to maintain the economy near full employment without aggravating inflationary pressures. The proper trade-off between these two goals is a source of ongoing debate. P-968
In which phase of the business cycle would you expect the following industries to enjoy their best performance? P-968a. Newspapersb. Machine toolsc. Beveragesd. Timber
Determine the profits of Firm C in the three scenarios, assuming fixed costs of $2 million and variable costs of$1.50 per unit. What are your conclusions regarding operating leverage and business
Large tax cuts in 2018 were followed by relatively rapid growth in GDP. How would demand-side and supply-side economists differ in their interpretations of this phenomenon? P-968
Suppose the government wants to stimulate the economy without increasing interest rates. What combination of fiscal and monetary policy might accomplish this goal? P-968
Consider an economy where the dominant industry is automobile production for both domestic consumption as well as export. Now suppose auto sales fall in response to an increase in the length of time
As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two of its bond issues, shown in the following table. P-963
Noah Kramer, a fixed-income portfolio manager based in the country of Sevista, is considering the purchase of a Sevista government bond. Kramer decides to evaluate two strategies for implementing his
Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, 7% coupon, 10-year-maturity, option-free
Carol Harrod is the investment officer for a $100 million U.S. pension fund. The fixed-income portion of the portfolio is actively managed, and a substantial portion of the fund’s large
A member of a firm’s investment committee is very interested in learning about the management of fixed-income portfolios. He would like to know how fixed-income managers position portfolios to
You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio.It appears that the economic cycle is
Patrick Wall is considering the purchase of one of the two bonds described in the following table.Wall realizes his decision will depend primarily on effective duration, and he believes that interest
One common goal among fixed-income portfolio managers is to earn high incremental returns on corporate bonds versus government bonds of comparable durations. The approach of some corporate-bond
Sandra Kapple presents Maria VanHusen with a description, given in the following table, of the bond portfolio held by the Star Hospital Pension Plan. All securities in the bond portfolio are
Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in five years, and have a 7% annual coupon rate paid semiannually.a. Calculate each of the following yields:i. Current
A newly issued bond paying a semiannual coupon has the following characteristics:Coupon Yield to Maturity Maturity Macaulay’s Duration 8% 8% 15 years 10 yearsa. Calculate modified duration using
a. A 6% coupon bond paying interest annually has a modified duration of 10 years, sells for$800, and is priced at a yield to maturity of 8%. If the YTM increases to 9%, what is the predicted change
a. Explain the impact on the offering yield of adding a call feature to a proposed bond issue.b. Explain the impact on both effective bond duration and convexity of adding a call feature to a
a. Use a spreadsheet to answer this question and assume the yield curve is flat at a level of 4%.Calculate the convexity of a “bullet” fixed-income portfolio, that is, a portfolio with a single
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value.a. What are the convexity and the duration of the
A 12.75-year-maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year-maturity 6% coupon bond
a. Footnote 7 presents the formula for the convexity of a bond. Build a spreadsheet to calculate the convexity of a 5-year, 8% coupon bond making annual payments at the initial yield to maturity of
a. Use a spreadsheet to calculate the durations of the two bonds in Spreadsheet 16.1 if the market interest rate increases to 12%. Why does the duration of the coupon bond fall while that of the zero
A 30-year-maturity bond has a 7% coupon rate, paid annually. It sells today for $867.42. A 20-year-maturity bond has a 6.5% coupon rate, also paid annually. It sells today for $879.50.A bond market
Find the duration of a bond with a settlement date of May 27, 2025, and maturity date November 15, 2036. The coupon rate of the bond is 7%, and the bond pays coupons semiannually. The bond is selling
Spice asks Meyers (see Problem 17) to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the fixed-rate note in the table. Specifically, he
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income
A 30-year-maturity bond making annual coupon payments with a coupon rate of 12% has duration of 11.54 years and convexity of 192.4. The bond currently sells at a yield to maturity of 8%.a. Use a
My pension plan will pay me $10,000 once a year for a 10-year period. The first payment will come in exactly five years. The pension fund wants to immunize its position.a. What is the duration of its
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can invest in two bonds, a zero-coupon bond with maturity of five years and a perpetuity, each currently yielding
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a
You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.a. What are the present value and duration of your obligation?b. What maturity
Currently, the term structure is as follows: 1-year zero-coupon bonds yield 7%; 2-year zerocoupon bonds yield 8%; 3-year and longer-maturity zero-coupon bonds all yield 9%. You are choosing between
Long-term Treasury bonds currently are selling at yields to maturity of nearly 6%. You expect interest rates to fall. The rest of the market thinks that they will remain unchanged over the coming
An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation
Rank the durations or effective durations of the following pairs of bonds: P-963a. Bond A is a 6% coupon bond, with a 20-year time to maturity selling at par value. Bond B is a 6% coupon bond, with a
You predict that interest rates are about to fall. Which bond will give you the highest capital gain? P-963a. Low coupon, long maturity.b. High coupon, short maturity.c. High coupon, long maturity.d.
a. The historical yield spread between AAA bonds and Treasury bonds widened dramatically during the financial crisis in 2008. If you believed that the spread would soon return to more typical
Repeat Problem 4, but now assume the coupons are paid semiannually. P-963
a. Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and has a yield to maturity of 6%.b. What is the duration if the yield to maturity is 10%?
A 9-year bond paying coupons annually has a yield of 10% and a duration of 7.194 years. If the market yield changes by 50 basis points, what is the percentage change in the bond’s price? P-963
How can a perpetuity, which has an infinite maturity, have a duration as short as 10 or 20 years? P-963
Prices of long-term bonds are more volatile than prices of short-term bonds. However, yields to maturity of short-term bonds fluctuate more than yields of long-term bonds. How do you reconcile these
Horizon analysis is a type of interest rate forecasting. In this procedure, the analyst forecasts the position of the yield curve at the end of some holding period and from that yield curve predicts
Active bond management consists of interest rate forecasting techniques and intermarket spread analysis. One popular taxonomy classifies active strategies as substitution swaps, intermarket spread
A more direct form of immunization is dedication, or cash-flow matching. If portfolio cash flows are perfectly matched to those of projected liabilities, rebalancing will be unnecessary. But
Immunization of a fully funded plan is accomplished by matching the durations of assets and liabilities. To maintain an immunized position as time passes and interest rates change, the portfolio must
Immunization is an important category of passive bond portfolio management. It attempts to render the individual or firm immune from movements in interest rates. This may take the form of immunizing
Convexity refers to the curvature of a bond’s price-yield relationship. Accounting for convexity can substantially improve the accuracy of the duration approximation for the response of bond prices
Duration is a direct measure of the sensitivity of a bond’s price to a change in its yield. The proportional change in a bond’s price equals the negative of duration multiplied by the
Even default-free bonds such as Treasury issues are subject to interest rate risk. Longer-term bonds generally are more sensitive to interest rate shifts than are short-term bonds. Macaulay’s
What will be the rate of return in Example 16.6 if the manager forecasts that in two years the yield on 18-year bonds will be 10% and the reinvestment rate for coupons will be 8%? P-963
How would an increase in trading costs affect the attractiveness of dedication versus immunization? P-963
Look again at Example 16.5. What would be the immunizing weights in the second year if the interest rate had fallen to 8%? P-963
What are the differences among Macaulay duration, modified duration, and effective duration? P-963
Use Spreadsheet 16,3 to test some of the rules for duration presented a few pages ago. What happens to duration when you change the coupon rate of the bond? The yield to maturity? The maturity? What
Show that the duration of the perpetuity increases as the interest rate decreases in agreement with rule 4, P-963
What Determines Duration? P-963
a. In Concept Check 16.1, you calculated the price and duration of a 2-year-maturity, 8% coupon bond making semiannual coupon payments when the market interest rate is 9%. Now suppose the interest
How many regression estimates of the SCL do we have from the sample? pl856
How many observations are there in each of the regressions? pl856
According to the CAPM, what should be the average value of the intercept in these regressions? pl856
What are the implications of the empirical SML being “too flat” compared to the predictions of the CAPM?Specifically, how will average returns on high- versus low-beta stocks compare to the
What would you have concluded if Fama and MacBeth had found that the coefficients on β2 and σ(e) were positive? pl856
Early tests of the single-factor CAPM were generally supportive of the model, but that support has long since evaporated. The positive relation between beta and average return has not characterized
Roll’s critique implies that the usual CAPM test is a test only of the mean-variance efficiency of a prespecified market proxy and therefore that tests of the linearity of the expected
Tests of the index model that account for human capital and cyclical variations in asset betas are more supportive of the CAPM and APT. Moreover, anomalies such as the size and book-tomarket effects
The dominant multifactor models today are variants of the Fama-French model, incorporating market, size, value, momentum, and, sometimes, liquidity or other factors. However, the recent emergence of
In some tests of consumption-based capital asset pricing models, consumption betas help to explain average portfolio returns and are associated with the Fama-French factors. These results support
The equity premium puzzle originates from the observation that equity returns exceeded the risk-free rate to an extent that is inconsistent with the covariance of returns with consumption risk and
Perform the first-pass regressions for a single-index model and tabulate the summary statistics. pl856
Specify the hypotheses for the second-pass regression used to test the SML of the CAPM. pl856
Perform the second-pass SML regression by regressing the average excess return of each portfolio on its beta. pl856
Summarize your test results and compare them to the results reported in the text. pl856

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