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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.
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