Quiz 1:`
As time passes, if interest rates remain constant, bond’s carrying value will approach face value. A bond issued at a premium will decline in price, and bonds issued at discount will appreciate.
EAR= (1+(APR/n periods per year))^n periods per year
Standard deviation measures total risk and Beta measures systematic risk.
Fisher Equation: estimates OK using nominal return- inflation= real return
YTM vs YTC: if at call, interest rates are lower than coupon, company will call the bonds because refinancing would occur at lower price save money!
XPNV function requires a CF0
NPV function doesn’t work with unevenly spaced cash flows use XPNV
Quiz 2
If a zero-coupon, duration equals time to maturity
Duration directly corresponds to interest rate risk:
%ChangePrice = -Duration*ChangeYTM/(1+ytm/2)
Real rate of interest= diff between T-bill and Inflation
Default Risk Premium= diff between corp bonds and treasury bonds
Interest Rate Risk Premium= diff between 30-year treasury and t-bill
Short term treasury bond rates are sometimes higher than long-term rates because it is expected that the Treasury will stomp out inflation, so rates are expected to fall long-term. You can’t maintain high inflation forever.
Quiz 3
When interest rates rise, prices on bonds drop and when rates fall, prices rise
Long term interest rates are generally higher due to increased interest rate risk premiums
In a normal distribution, mean=median=mode
Positive skew: mean>median more than half of returns will be below the mean (on left side)
Negative skew: mean<median more than half of returns above mean (on right side)
Positive kurtosis: longer tails, more mass in tails
Negative kurtosis: more mass in the middle
Expected Return +/- 1 Standard Deviation approximately 68% of the time
Expected Return +/- 2 Standard Deviation approximately 95% of the time
Expected Return +/- 3 Standard Deviation nearly 100% of the time
Leptokurtosis (positive) – tall, thin, excess tails
Platykurtosis (negative) – more mass
=NORMDIST gives you area under the curve to the left of the X value
Quiz 4
Efficient frontier: upward sloping part of the curve on left hand side. It represents the combinatioin of weight in a portfolio that mazimizes the relationship between risk and return
Stocks with high stdev and low beta must have a lot of unsystematic risk
Low Return and high risk equity could be good for portfolio diversification if negatively correlated or low beta.
In a regression:
X-variable is returns on the market (independent var)
Y-variable is individual returns (dependent var)
Xvariable
