FIN 410 Midterm #2

Question 1

According to CPI how do we know if inflation has changed?

Answer 1

If the CPI level changes, (for example: from 2 to 3.)`

Question 2

The CPI is more than twice what it was in 1980

Answer 2

True

Question 3

Your purchasing power decreases from year to year in the pretense of inflation.

Answer 3

True

Question 4

Benefits of ETF’s:

Answer 4

• ETF’s can be sold short
• Can be bought and sold anytime like regular stocks at real-time prices.
• Low fees
• Tax-Efficient

Question 5

Assumptions that are used to derive the CapM

Answer 5

a. All investors are dealing with the same expected holding period.
b. All investors are working with the same set of publicly traded assets.
c. Investors have unlimited access to risk-free borrowing and lending.
d. Investors do not pay taxes or transaction costs.
e. All investors are mean-variance optimizers.

Question 6

UIT

Answer 6

Unit Investment trust:

• Pools of money fixed for the life of the fund.
• Little active management
• Investors who want to liquidate, sell their shares back to the entity that issued them.

Question 7

“Open end” Managed investment companies

Answer 7

(Mutual FUnd)

• Sold at net asset value of sponsor.
• NAV changes when new shares are sold or old shares are redeemed.

Question 8

Closed End

Answer 8

• Sold at premium or discount NAV to other investors.
• Fund companies issue a fixed #
• You buy or sell shares on an exchange.

Question 9

NAV

Answer 9

(market value of assets)-liabilities / (shares outstanding)

Question 10

12b-1 charges are used to pay for what?

Answer 10

Advertising, promotional literature, and brokers.

Question 11

Equation with all fees put into it:

Answer 11

Gross Return = (1-f)(1+r-a)^n(1-b)

r = growth rate per year
f = frond end load
b = back end load
a = annual expense ratio
n = # of periods.

Question 12

ETF fact

Answer 12

Investors have the right to exchange their shares for the underlying securities of the fund.

Question 13

CPI FACT

Answer 13

The CPI index price level has generally remained at the 1984 level over the last 20 years.

Question 14

Flat price

Answer 14

The bond price without accrued interest

Question 15

Invoice price

Answer 15

Bond price with accrued interest.

Question 16

Settlement date

Answer 16

The date the bond is purchased

Question 17

YTM

Answer 17

The “average” discount rate for a bond with multiple cash flows.

Question 18

Interest rate decreases with what?

Answer 18

A higher coupon PMT.

Question 19

Is duration and exact measure?

Answer 19

NO! It is an APPROXIMATION of the price change for given interest rate change.

Question 20

Fact #1 about Durations

Answer 20

Duration underestimates the increase in bond prices when yield falls.

Question 21

Fact #2 about Durations

Answer 21

Duration overestimates the decline in price when the yield rises.

Question 22

The higher the Duration number:

Answer 22

The higher the risk and expected return.

Question 23

What type of bond uses the “bank discount method”

Answer 23

T-bills

Question 24

What is an inverted yield curve

Answer 24

Long term government rates are lower than short term rates.

Question 25

Beta equation

Answer 25

= Cov(ri,rm) / Var(rm)