Risk and Return Measures - Answers 21 - 31

  1. "A". The fifteen year zero coupon is a pure duration play.
  2. "B". First determine the yield change. Then multiply the change by the duration. Finally, multiply the existing bond price by the complement of the price change. The price will increase by this percentage as the yield decreased.
  3. "A". Assets are recorded at historical cost.
  4. "B". Multiply the difference in yield by duration. Because the yield increases, the percentage price change is negative.
  5. "D". Because of the greater possibility of default risk and uneven cash flows, many analysts adopt a quasi-equity approach to valuation which may be further refined to take into account the unique attributes of the industry.
  6. "C". The analyst should rely on no one particular model to arrive at a company's valuation, an often subjective process. Dividend discount models can be both static and dynamic.
  7. "D". All of these statements describe the cost of capital.
  8. "C". The perpetuity valuation model may be used to appraise preferreds and real estate. V=E/R where the value=earnings or cash flow divided by the cost of capital.
  9. "A". Divide the yield change into the price change.
  10. "B". The risk-free rate is the rate on t-bills.
  11. "C". These statements define duration and give examples of its application.
Introduction


Related Articles
  1. Professionals

    Sample Questions 21 - 26

    Sample Questions 21 - 26
  2. Professionals

    Effective, Modified, and Macaulay Duration

    CFA Level 1 - Duration. Learn the differences between effective, modified and Macaulay duration. Shows how to apply a weighted duration to a portfolio of bonds.
  3. Professionals

    Duration

    CFA Level 1 - Duration. Learn how duration measures the price sensitivity of a bond. Provides sample calculations for duration and how it relates to yield-curve risk.
  4. Bonds & Fixed Income

    Use Duration And Convexity To Measure Bond Risk

    Find out how this measure can help fixed-income investors manage their portfolios.
  5. Professionals

    Yield Terms

    FINRA Series 6 Exam Study Guide - Yield Terms. This section distinguishes three types of yield calculations for bonds.
  6. Bonds & Fixed Income

    Advanced Bond Concepts: Duration

    The term duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an ...
  7. Professionals

    Duration

    Understanding duration helps to determine a bond's price volatility.
  8. Professionals

    Duration and Stock Risks

    FINRA/NASAA Series 66: Section 5 Duration and Stock Risks. This section discusses duration and risks associated with investing in the stock markets: systematic, unsystematic, business, regulatory ...
  9. Financial Advisors

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  10. Professionals

    Sample Questions 27 - 31

    Sample Questions 27 - 31
RELATED TERMS
  1. Dollar Duration

    Dollar duration measures the dollar change in a bond's value ...
  2. Empirical Duration

    The calculation of a bond's duration based on historical data. ...
  3. Effective Duration

    A duration calculation for bonds with embedded options. Effective ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) ...
  5. Key Rate Duration

    Holding all other maturities constant, this measures the sensitivity ...
  6. Relative Valuation Model

    A business valuation method that compares a firm's value to that ...
RELATED FAQS
  1. One way to determine the volatility of a bond is to calculate its duration ...

    The correct answer is a): Duration is the change in the value of a fixed income security that will result from a 1% change ... Read Answer >>
  2. What is the relationship between modified duration and interest rates?

    Learn about modified duration and Macaulay duration, how to calculate the durations of bonds, and how interest rates and ... Read Answer >>
  3. What is the average profit margin of a company in the chemicals sector?

    Learn more about the Macaulay duration and the modified duration, how to calculate a bond's Macaulay duration and modified ... Read Answer >>
  4. What is the risk return tradeoff for bonds?

    Find out more about the Macaulay duration and modified duration, how to calculate them and the difference between the Macaulay ... Read Answer >>
  5. Which is a better metric, modified duration or Macaulay duration?

    Learn why the modified duration is a more useful metric than the Macaulay duration, and understand how the measures are different ... Read Answer >>
  6. How does duration impact bond funds?

    Learn how duration for a bond fund measures the risk the bond portfolio has to a rise in interest rates, and see how managers ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center