Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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In general, would a falling rate of market interest cause the price of an MPT security to increase or decrease? Would the increase or decrease be greater if the security was issued at a discount? Would an increase in prepayment be likely or unlikely? Describe with an example.
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- Explain why futures contracts may mitigate the credit risk involved in forward contracts.arrow_forwardIn the context of the Pastor-Stambaugh multifactor model (PSM), the relevant risk factors are the same as those in the Fama-French multifactor model plus an additional factor that represents __________. seasonality in security returns industrial production a liquidity premium expected inflationarrow_forwardA forward rate is the mathematical expectation of a future spot rate in risk neutral world. O True Falsearrow_forward
- Changing the market risk premium A. Changes neither the y-intercept nor the slope of the security market line B. Changes only the y-intercept of the security market line C. Changes only the slope of the security market line D. Changes both the y-intercept and the slope of the security market linearrow_forwardWhat is meant by the real risk-free rate of interest? Seleccione una: a. The nominal risk-free interest rate, less the expected inflation. b. The rate actually used in the market, not in textbooks. c. The rate quoted on short-term Treasury bills. d. The opportunity cost of foregoing consumption, representing the rate that must be offered to individuals to persuade them to save rather than consume.arrow_forwardMacaulay duration is the optimal holding period to immunize the interest rate risks, namely to make the reinvestment risk and selling price risk offset one another completely. O True O Falsearrow_forward
- If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.arrow_forwardWhat effect does Risk-free rate have on call option price?arrow_forwardWhen market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a security classified as HTM? Would your answer change if the drop in fair value was due to worsened financial conditions at the investee?arrow_forward
- What kind of interest rate swap would a commercial bank with a negative re - pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)? Explainarrow_forwardRisk and Return: Introduction Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk ; investors dislike risk and require -Select- Vrates of return as an inducement to buy riskier securities. A represents the additional compensation investors require for bearing risk; it is the difference betweer the expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways: On a stand-alone basis and in a portfolio context. -Select- -Select-arrow_forwardContraction risk is the risk that loan principal will be repaid more rapidly than expected, typically when interest rates have increased. Select one: True Falsearrow_forward
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