Time Influence on Valuation

Question 1

Net Present Value

Answer 1

present value of future cash flows minus the purchase price of an investment.You should have checked this.

Question 2

Convexity

Answer 2

Relationship between bond prices and yields

Question 3

Duration

Answer 3

Measure of the average maturity of stream of payments generated by a financial asset/weighted average of the length of time until the remaining payments of the assets are made
Weighted average of PV of Future Cash Flow of a fixed income investment

Question 4

Five bond pricing theorems

Answer 4

1) If bond’s market price increases, then its yield must decrease and vice versa
2) If a bond’s yield does not change, then the size of its discount or premium will decrease as its life gets shorter
3) If a bond’s yield does not change, then the size of it discount or premium will decrease at an increasing rate as its life gets shorter
4) Decrease in bond’s yield will raise the bond’s price by an amount greater in size than the corresponding fall in the bond’s price that would occur if there were an equal-sized increase in the bond’s yield
5) Percentage change in a bond’s price as a result of a change in yield will be smaller if the coupon rate of the bond is high

Question 5

Degree of convexity for bonds depends on

Answer 5

-size of coupon payments
-life of bond
current market interest rate

Question 6

Variables that determine bond’s duration

Answer 6

• Coupon rate
• Market interest rate
• # compounding periods until maturity

Question 7

Which of the options can be termed as the face value of a bond, or the amount that’s returned to the bondholder at maturity?

Answer 7

Par/Principal

Question 8

Dividend Discount Model (DDM)

Answer 8

specific valuation model where you assume a constant dividend with no future growth (known as a perpetuity).

Question 9

Typical types of cash flows for bonds

Answer 9

• periodic coupon interest payments,
• reinvestment of those coupon payments, and
• repayment of principal when the bond matures

Question 10

Covariance

Answer 10

Statistical measure of the relationship between two random variables

Question 11

Which of the following variables is used to determine a bond’s duration

Answer 11

Coupon rate, market interest rate, and the number of compounding periods until maturity. Note that “price” is not a determinant in calculating duration. Price is a function of the market rate of interest.

Question 12

When illustrating investment returns over a period of time greater than one year, what is the appropriate measure of return that should be used?

Answer 12

The appropriate measure to use for periods of greater than one year is time-weighted rate of return.