Question
Please, Complete questions 1, 3 and 5. Table 5.1 indicates that the average annual rate of return on common stocks over many years has exceeded
Please, Complete questions 1, 3 and 5.
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Table 5.1 indicates that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States. Why do we observe this pattern?
2. Suppose the realized rate of return on government bonds exceeded the return on common stocks one year. How would you interpret this result?
3. What is most important to investors: the number of a companys shares they own, the price of the companys stock, or the value of their shareholdings in the company? Why?
4. Two 20-year bonds are identical in all respects except that one allows the issuer to call the bond in return for $1,000 cash at any time after five years, while the other contains no call provisions. Will the yield to maturity on the two bonds differ? If so, which will be higher? Why?
5. The return an investor earns on a bond over a period of time is known as the holding period return, defined as interest income plus or minus the change in the bonds price, all divided by the beginning bond price. What is the holding period return on a bond with a par value of $1,000 and a coupon rate of 6 percent if its price at the beginning of the year was $1,050 and its price at the end was $940? Assume interest is paid annually. Can you give two reasons the price of the bond might have fallen over the year?
Table 5.1 Rate of Return on Selected U.S. Securities, 1928-2016
Security | Return |
Common Stocks | 11.4% |
Long-term corporate bonds | 5.7% |
Long-term government bonds | 5.2% |
Short-term government bills | 3.5% |
Consumer price index | 3.1% |
Real return=5.2-3.1=2.1%(Exact real return=(1.052)/(1.031)-1=2.0%)
Default premium=5.7%-5.2%=0.5%
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