CHAP 6

… is an order to buy or sell a security at the opening/closing price

• limit order

• market order

• stop order

• ATO; ATC

Principle of price auction in decreasing order of priority:

• price priority, customer priority, time priority, quantity priority

• time priority, price priority, customer priority, quantity priority

• price priority, time priority, customer priority, quantity priority

• price priority, time priority, quantity priority, customer priority

Which of the following assumptions does the constant-growth discount model require?

• dividends grow at a constant rate

• the dividend growth rate continues indefinitely

• the required rate of return is higher than the dividend growth rate

• all of the above

Which of the following statements is true?

• a bondholder repays principal when the bond matures

• generally speaking, bonds are riskier than common stocks

• low inflation is expected to have a negative effect on bond prices

• bonds are usually less liquid than stocks

Which type of risk below is classified as systematic risk?

• reinvestment risk

• management and corporate governance risk

• business risk

• liquidity risk

Which type of risk below is classified as non-systematic risk?

• inflation risk

• legal risks

• reinvestment risk

• default risk

Your bank is considering investing in a stock that has an expected yield of 10%. The T-bill interest rate is 8%, the average interest rate of the stock market is 12%, the stock under consideration has risk equal to 70% of the average market risk. What should investors do?

• invest because required rate is lower than real interest rate

• do not invest because real interest rate is lower than required rate

• do not invest because real interest rate is higher than required rate

• unspecified and no advice

Your bank is considering investing in a stock that has an expected yield of 9%. The T-bill interest rate is 6%, the average interest rate of the stock market is 10%, the stock under consideration has a beta of 0.6. What should investors do?

• invest because required rate is lower than real interest rate

• do not invest because real interest rate is lower than required rate

• do not invest because real interest rate is higher than required rate

• unspecified and no advice

Similarities between internal rate of return (IRR) and yield to maturity (YTM)

• they are discount rates that make the net present value (NPV) of all cash flows from a bond equal to zero

• they are often determined by interpolation method

• they can be determined by 3 methods: trial and errors, interpolation and graph method

• all of the above

In Capital Asset Pricing Model (CAPM): Ri = Rf + βi (RM - Rf), what can we call Rm - Rf?

• expected return of investment i

• risk-free rate

• risk premium of the investment i

• market risk premium