Darlene Mainee owns a portfolio which consists of 3 bonds. What is the duration of the bond portfolio?
Correct Answer: B
This calculation is very similar to a Weighted Average Cost of Capital computation. The first step requires that each bond be assessed for its relative weight in the portfolio. The corresponding weight is then multiplied by the bond's duration which provides the bond's contribution to the overall portfolio duration. Note: While this problem provides the bond's market value (already computed) it could be left to the candidate to determine on an exam. The bond's market value is simply the bond's price (relative to par) multiplied by the corresponding par value. The detailed computation follows: Total Market Value of Portfolio = Market value of each bond added together = $1,503,668 + $13,554,769 + $27,385,114 =$42,443,551 Next: Compute the relative weight of each bond in the portfolio. Weight of 6.00%, 2,000,000 par value bond in portfolio (duration of9.07) = Market value of Bond /Market Value of Total Portfolio = 0.035 Weight of 4.50%, 14,700,000 par value bond in portfolio (duration of 2.30)= Market value of Bond /Market Value of Total Portfolio = 0.319 Weight of 9.00%, 20,000,000 par value bond in portfolio (duration of 9.63) = Market value of Bond /Market Value of Total Portfolio = 0.645 The portfolio's duration equals the weighted average of each bond's duration multiplied by its weight: 0 .035 * 9.07 + 0.319 * 2.30 + 0.645 * 9.63 = 0.3212 + 0.7332 + 6.2117 = 7.2661
Question 232
The strong form of the efficient market hypothesis states that: I). security prices reflect all publicly available information. II). insider information contains no special advantage. III). major market events can be predicted.
Correct Answer: B
Question 233
Which of the following will cause an increase in aggregate demand in the United States?
Correct Answer: C
People will buy now before prices go higher. Thus the expectation of an increase in the inflation rate will stimulate current aggregate demand.
Question 234
The market price of stock X is now $30. An order specifies the stock must be bought once the price drops to $25 or below. This order is likely to be a:
Correct Answer: B
Investors can issue limit orders, whereby they specify prices at which they are willing to buy or sell a security. For example, if the stock falls below the limit on a limit-buy order, then the trade is to be executed. Orders also can be limited by a time period (1 day, 1 week, 1 month, or good till canceled, etc.).
Question 235
A firm finds that producing 30,000 vases costs $180,000 while producing 40,000 vases costs $ 200,000. This pattern might be explained by:
Correct Answer: A
Economies of scale imply that average total cost declines as output increases in the long- run. In this example, average total cost falls from $6 to $5 when production increases by 10,000 vases. It could have been caused by increasing marginal productivity if this were the short run, but that is not given as an option.
