⾦融简答
77. Briefly explain how individuals can adjust their preferences for current and future consumption.
Individuals can adjust their preferences for consumption by borrowing or lending in the financial market. The appropriate balance between prent and future consumption that each individual will choo depends on personal preferences. But individuals with different preferences can adjust their preferences using financial market.
Type: Difficult
91. Briefly explain the term "discount rate."
Discount rate is the rate of return ud for discounting future cash flows to obtain the prent value. The discount rate can be obtained by looking at the rate of return, an equivalent investment opportunity in the capital market.
Type: Difficult
92. Intuitively explain the concept of the prent value.
If you have $100 today, you can invest it and start earning interest on it. On the other hand, if you have to make a payment of $100 one year from today, you do not need to invest $100 today but a lesr amount. The lesr amount invested today plus the interest earned on it should add up to $100. The prent value of $100 one year from today at an interest rate of 10% is $90.91. [PV = 100/1.1 = 90.91]
Type: Difficult
93. State the "net prent value rule."
Invest in projects with positive net prent values. Net prent value is the difference between the prent value of future cash flows from the project and the initial investment.
Type: Medium
94. Briefly explain the concept of risk.
If the future cash flows from an investment are not certain then we call it a risky cash flow. That means there is an uncertainty about the future cash flows or future cash flows could be different from expected cash flows. The degree of uncertainty varies from investment to investment. Generally, unc
蒜蓉粉丝蒸生蚝ertain cash flows are discounted using a higher discount rate than certain cash flows. This is only one method of dealing with risk. There are many ways to take risk into consideration while making financial decisions.
Type: Difficult
95. State the "rate of return rule."
Invest as long as the rate of return on the investment exceeds the rate of return on equivalent investments in the capital market.
Type: Medium
96. Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.
If a dollar tomorrow is worth less than a dollar a day after tomorrow, it would be possible to earn a very large amount of money through "money machine" effect. This is only possible, if someone el is losing a very large amount of money. The conditions can only exist for a short period of time, and cannot exist in equilibrium as the source of money is quickly exhausted. Thus a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.
Type: Difficult
97. Define the term "perpetuity."
A perpetuity is defined as the same cash flow occurring each year forever.
Type: Medium
98. Describe how you would go about finding the prent value of any annuity given the formula for
山1the prent value of a perpetuity.
The prent value of any annuity can be thought of as the difference between two
perpetuities one payment stating in year-1 (immediate) and one starting in year (n + 1)
(delayed). By calculating difference between the prent values of the two perpetuities
today we can find the prent value of an annuity.
Type: Medium
99. What is the difference between simple interest and compound interest?
When money is invested at compound interest, each interest payment is reinvested to earn more interest in subquent periods. In the simple interest ca, the interest is paid only on the initial investment.
Type: Medium
100. Briefly explain, "continuous compounding."
As frequency of compounding increas, the effective rate on an investment also increas. In ca of continuous compounding the frequency of compounding is infinity. In this ca, the nature of the function also changes. The effective interest rate is given by (e r - 1), where the value of e = 2.718. e is the ba for natural logarithms.
Type: Difficult
Short Answer Questions
50. Briefly explain the cash flows associated with a bond to the investor.
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Bonds provide two types of cash flows: interest payments and the principal payment. Interest payments occur each period, usually annually or mi-annually. Periodic interest payments are also called coupon payments. Thus this forms an annuity. Principal payment occurs at the time of maturity of the bond and is a lump sum payment.
Type: Easy
51. Briefly explain the term "yield to maturity."
The yield to maturity is the single discount rate that is ud to calculate the prent value of cash flows received from buying a bond. It is ud for calculating the bond value. Conceptually it is the same as the internal rate of return (IRR). It is also stock-in-trade of any bond dealer.
Type: Medium
52. What is the relationship between interest rates and bond prices?
Interest rates and bond prices are inverly related. High interest rates cau bond prices to fall and vice-versa. For a given change in interest rates, prices of long-term bonds fluctuate more than for short-term bonds. Similarly, for a given change in interest rates low coupon bond prices fluctuate mo
re than for high coupon bonds.
Type: Medium
53. Discuss the concept of duration.
Duration can be thought of as the weighted average time of a bond's cash flow. The weights are determined by the prent value factors. Duration is expresd in units of time. Duration is an important concept for two reasons. First, the volatility of a bond is directly related to its duration. Second, one way to hedge interest rate risk is through a strategy of duration matching.
Type: Difficult
54. Briefly discuss the concept of volatility.
V olatility is calculated as Duration/ (1 + yield). Bonds with longer duration also have greater volatility. Bond's volatility is directly related to duration. V olatility is also the slope of the curve relating the bond price to the interest rate.
Type: Medium
55. Briefly explain what is meant by "the term structure of interest rates."
The term structure of interest rates is the plot of interest rates on the y-axis and the maturity on the x-axis. It is also called the yield curve. It shows how interest rates and maturity are related. Economists have developed veral theories to explain the shape of the yield curve.
Type: Medium
56. Briefly explain the expectations theory.
This theory postulates that the current forward rates are the expected value of the corresponding future spot rates.
Type: Medium
57. What is the relationship between real and nominal rates of interest?
The exact relationship is given by:
(1 + nominal rate ) = (1 + real rate) * (1 + expected Inflation rate). It can also be written as: nominal rate = real rate + Inflation rate + (real rate) * (Inflation rate)
Type: Easy
58. Define the term, "real interest rate."
Real interest rate is the inflation adjusted nominal interest rate. We do not obrve it directly. The relationship between the two is given by:
1 + r nominal = (1 + r real rate)(1 + inflation rate). (An approximate formula that works for low values is: r nominal = r real rate + Inflation rate)脚上长肉刺图片
Type: Medium
59. What are TIPs? Briefly explain.
TIPs(Treasury Inflation-Protected Securities) are issued by the U.S. Treasury. The U.S. Treasury began issuing TIPs in 1997. The are also known as Inflation-indexed bonds. The real cash flows on TIPs are fixed, but the nominal cash flows, which includes interest and principal, are incread as the Consumer Price Index (CPI) increas. Thus the buying power of the lender in protected.
Type: Medium
60. What is the relationship between spot and forward rates?
A forward rate is the internal rate of return derived from the future value of bonds given spot rates from two different maturity bonds.
Type: Difficult
Essay Questions
59. Explain the term "primary market."
When new shares of common stocks are sold in the market to rai capital, it is called a primary market transaction. A good example of a primary market transaction is the IPO (Initial Public Offering).
Type: Easy
60. Explain the term "condary market."
When already issued stocks are traded in the market, it is called a condary market transaction. Most transactions in the stock market are condary market transactions.
Type: Easy
61. Briefly explain the major types of exchanges prevalent in the USA.
There are two types of exchanges that are prevalent in the USA. They are auction markets and dealer markets. The New
York Stock Exchange is an example of an auction market. Here specialists act as auctioneers and match up would-be buyers and llers. The Nasdaq is an example of a dealer market. In the ca of a dealer market all trades take place between a group of dealers and the investors. Dealer markets are also active in trading many other types of financial instruments such as bonds.
Type: Medium
62. Briefly explain the term "market capitalization rate."
The rate of return expected by the investors in common stocks is called the market capitalization rate. It is also called the cost of equity capital. For a constant growth stock it is the dividend yield plus the growth rate in dividends.
Type: Medium
63. Discuss the general principle in the valuation of a common stock.
The value of a common stock is the prent value of all the dividends received by owning the stock discounted at the market capitalization rate or the cost of equity. This is called the discounted cash flow (DCF) method.
Type: Medium
64. Briefly explain the assumptions associated with the constant dividend growth formula.
There are two important assumptions that are necessary for the formula to work correctly. First assumption is that the growth rate in dividends is constant. The cond assumption is that the discount rate is greater than the growth rate in dividends. Type: Difficult
65. Discuss the term "price-earnings (P/E) ratio."
The P/E ratio is a widely ud financial indicator, but is also quite ambiguous. Generally, a high P/E ratio indicates that the investors think a firm has good growth potential. It is the ratio of current market price and earnings of a stock.
Type: Medium
66. Briefly explain how the formulas that are ud for valuing common stocks can also be ud to value business.
The formulas that are ud to value common stocks can also be ud to value entire business. In the ca of business, free cash flows generated by the business are discounted. Typically a two-stage DCF model is ud. Free cash flows are forecasted out to a horizon and discounted to prent value. Then a horizon value is forecasted, discounted and added to the prent value of free cash flows. The sum is the value of the business. This may look easy in theory but is quite complicated in practice.
Type: Difficult
67. Briefly explain why Microsoft experienced a significant drop in price when it announced its first ever regular dividend along with huge profits.
Under the concept of PVGO, Microsoft was converting form a company with significant growth to a company with no growth. An increa in the dividend for a growth company is often a sign of reduced growth. Thus, the market would have reacted negatively to the news.
Type: Difficult
法国獒犬Short Answer Questions
68. Define the term risk premium.
The difference between the curity return and the risk free rate, such as a Treasury bill return, is called the risk premium. This denotes the additional return on the curity becau of additional risk.
大刀关胜Type: Medium
69. Briefly explain the term "variance" of the returns.
Variance is a standard statistical measure of spread. The variance is the expected squared deviation from the expected return. From a finance point of view this measures the total risk of a curity: higher the variance, higher the risk. This is also called the measure of total risk.
Type: Medium
70. Briefly explain how diversification reduces risk.
Diversification reduces risk becau prices of different curities do not move exactly together. Whe
n you form portfolios using a large number of stocks the variability of the portfolio is much less than average variability of individual stocks. Type: Medium
71. In the formula for calculating the variance of N-stock portfolio, how many covariance and variance terms are there?
In the formula for calculating the variance of N-ast portfolio, there are [N(N - 1)]/2 covariance terms and N variance terms. Type: Easy
72. Briefly explain how "beta" of a stock is estimated.
"Beta" of a stock can be estimated graphically by plotting the market returns on the x-axis and the corresponding stock returns on the y-axis. The slope of the resulting linear graph is the "beta" estimate for the stock. [ i = Cov(R i, R m)/Var(R m)] Type: Medium
73. Briefly explain what "beta" of a stock means.
For each additional 1% change in the market return, the return on the stock on the average changes by "beta" times 1%. For example the beta of IBM is 1.59, then for additional 1% change in the market return is expected change the returns on the IBM stock by 1.59%.
Type: Difficult
74. Discuss the importance of "beta" as a measure of risk.
"Beta" is a measure of market risk. It is also called relative measure of risk as it measures risk relative to the market risk. Beta is uful as a measure of risk in the context of well-diversified portfolios. It measures the risk contribution of a single curity to the portfolio risk.
Type: Medium
75. Briefly explain the difference between beta as a measure of risk and variance as a measure of risk.
Variance measures the total risk of a curity and is a measure of stand-alone risk. Total risk has both unique risk and market risk. In a well-diversified portfolio, unique risks tend to cancel each other out and only the market risk is remaining. Beta is a measure of market risk and is uful in the context of a well-diversified portfolio. Beta measures the nsitivity of the curity returns to changes in market returns. Market portfolio has a beta of one and is considered the average risk.
Type: Medium
76. Briefly explain how individual curities affect portfolio risk.
The risk of a well-diversified portfolio depends on the market risk of the curities included in the portfolio. Portfolio beta is the weighted average of individual curity betas included in the portfolio.
洋溢造句Type: Medium
77. What is the beta of a portfolio with a large number of randomly lected stocks?
The beta of a portfolio with a large number of randomly lected stocks is equal to one. The standard deviation of such a portfolio is equal to the standard deviation of the market.
Type: Medium
78. How can individual investors diversify?
One of the simplest ways for individual investor to diversify is to buy shares in a mutual fund that holds a diversified portfolio. Type: Medium
犰怎么读79. Briefly explain the concept of value additivity.
