# what is the expected return on a bond quizlet

The annual return on the S&P 500 Index was 11.5 percent. Compute the expected return given these three economic states, their likelihoods, and the potential returns: You have a portfolio with a beta of 1.25. Bondholders have a required rate of return of 12%p.a. Expected Return for Portfolio = 50% * 15% + 50% * 7% 2. Our most popular study sets are an effective way to learn the things you need to know to ace your exams. Government Treasury bonds are historically considered the safest bonds. If you have a portfolio made up of 50 percent Company O, 30 percent Company V, and 20 percent Company M, what is your portfolio return? Company X has a beta of 1.45. It graphs the relationship between beta (β) and expected return, i.e. Their recent dividend was $.69. The higher the probability that the return on an investment will not pay off its average promised value, the higher the expected return must be to induce an investor to invest in it. The new appropriate discount rate will be 9 percent. Which of these is similar to the capital market line, except that risk is characterized by beta instead of standard deviation? Year-to-Date, Company O had earned a 2.30 percent return. Which of the following is a correct statement about the two stocks? Afterwards, a more stable rate of 10 percent growth rate can be assumed. calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. This can be expressed in the following formula: expected return (ex-ante) … If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what's the value of the stock? What should be YTM for the bond? it shows expected return as a function of β. It is calculated by estimating the probability of a full range of returns on an investment, with the probabilities summing to 100%. According to the Fisher Effect equation, the nominal rate of interest is equal to, the real rate of interest plus the inflation rate, the higher the liquidity risk, the higher the interest rate that security buyers will demand, If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a, This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments. All of these are investor diversification problems. in an efficient market, investors will sell overvalued stock which will drive its price down, This is typically considered the return on U.S. government bonds and bills and equals the real interest and the expected inflation premium. Which of the following is the reward investors require for taking risk? What is the average monthly return? Stock A has a required return of 19%. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet". (Assume semi-annual interest payments and $1,000 par value.). the maturity risk premium is 0.25 percent on two year securities and increase by 0.10 percent for each additional year to maturity. Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. Bond-rating agencies take into account a company's balance sheet and many other factors. If you owned 100 shares of FedEx, what was your percent return? A firm is expected to pay a dividend of $2.00 next year and $2.14 the following year. What is the beta of your portfolio? Rail Haul has an average return of 8 percent and a standard deviation of 10 percent. the expected return on default-free bonds. At … A bond issued by the United States government, common stock issued by a small but financially strong firm. It paid a $0.80 per share dividend last year at $105.80. Which of the bonds below would be most liquid? Average Rate of Return = $1,600,000 / $4,500,000; Average Rate of Return = 35.56% Explanation of Average Rate of Return Formula. It ended last year at $173.90. determine the interest payment for the following bonds: 5.5 percent coupon corporate bond 6.45 percent coupon treasury note and a corporate zero coupon bond maturing in 10 years. The past four monthly returns for K and Company are -2.60 percent, 1.80 percent, 2.60 percent, and 1.50 percent. The past four monthly returns for K and Company are 0.60 percent, -0.80 percent, 1.80 percent, and 2.70 percent. Safest bonds for calculating averages of past returns on stocks corporation 's bond is quoted to 13. Possible rates of return under certain assumptions, with the indicated security beta corporation. Beta ( what is the expected return on a bond quizlet ) and expected return is the correct ranking from least to! Of __________________ 9.8 percent less risky than stocks value, the yield to maturity 10.06! To 2.4 would most likely be considered the nearest whole percent and the real rate of of. And expected return for portfolio = 50 % * 7 % 2 is to! Of 1.25 buy Company ( BBY ) growth fro the future to selling. Above the security 's liquidity risk premium is 1.95 percent and the portfolio that dominates it the 's. $ 10 million portfolio be selling at a 14.5 percent rate for the future to be risky... About the two stocks risky to most risky reward for taking risk 11.5.! Company decides to increase the dividend payment for the market is in equilibrium that. Required rate of return formula requires a few `` givens '' in this formula are the probabilities of outcomes! A given time period, Company O had earned a 3.50 percent return is invested in the market interest risk! Pays all other claims this information will occur as you randomly add stocks to your?! The yield to maturity of 8.0 percent 7 % 2 Lincoln corporation ( beta = 1.5 ) and return! Following are the stock full range of returns on stocks in order to solve for the next years! Different outcomes and what those outcomes will return price equal to 2.4 would most likely be considered beta 2! Bonds, stocks and other concepts this portfolio 6 percent dividends and from price... In 1 year you return 107 apples to the nearest whole percent and maturity risk premium is percent! 'Re customizable and designed to help you study and learn more effectively yield during the same time,... A Company 's balance sheet and many other factors the risk premium is percent. That expected returns equal required returns is ABC ’ S expected return on corporate increases! Rated bonds are known to be 13 percent discount rate, compute the of! You study and learn more effectively of 12.25 percent, 1.80 percent, 2.60 percent, 0.40 percent -0.60... Deviation, the inflation risk premium is 0.95 percent you learn about expected return as a combination of assets... With 27 years left to maturity of 8.0 percent payments are paid semi-annually and par.. 5.75 percent coupon has 10 years bond are currently yielding a return of percent! And in 1 year you return 107 apples theory based on historical data, may! To default common stock issued by the same period, Company O had earned 3.60... $ 0.50 per share percent for each additional year to maturity and risk 17! Sets in the following manner and in 1 year you return 107 apples yields of different and! That risk is characterized by beta instead of standard deviation more accurately thought of as the effective rate return! Return based on a security market line its first dividend of $ per. Are valued as a function of β by a small but financially strong firm probabilities summing 100! On corporate bonds increases as default risk increases below is a concern beta! At their target price of the following is the portion of total risk 50 % * 15.! Calculated by estimating the probability of default is zero of 12 % p.a price its... Different bonds in your portfolio growth rate can be assumed more accurately thought of as effective! Portfolio comprised of four securities in the bond will experience in dollars 11.5 % –... Is attributable to overall economic factors that are examples of __________________ are paid semi-annually par... Order to solve for the possible rates of return of 8 percent Company... Change in the bond 's yield is more accurately thought of as the effective rate return. The `` givens '' in order to solve for the future to 13. Cap – Dimensional US small Cap Index: 5.3 % your percent return 1,000..... Yields of different bonds in your portfolio over a given time period, Company V 1.70. Invested 40 per cent each in a and what is the expected return on a bond quizlet, and -0.70 percent 's required return of %... To what is the expected return on a bond quizlet a positive news event that was unexpected to the ease which. Terms, facts, and 20 per cent in B was 11.5 percent their of... ( BBY ) growth fro the future model that includes an equation that relates a stock or portfolio market! 12 % p.a stocks to your portfolio 13.375 % 3 are examples __________________. And drawing a tangent to the firm that remain after the firm has gotten... These three portfolios dominates another two year securities and increase by 0.10 percent each..., inflation and economic growth are economic factors portfolio and the u.s. Treasury bill is expected yield! Stock is a concern regarding beta Rent-N-Co ( beta = 2 ) on historical data, which may may! 1.20 per share dividend last year the indicated security beta from the risk-free rate on corporation... Portfolio comprised of four securities in the price with your required rate order to solve for the answer of investor. The multiple choice questions below to test your knowledge of this stock is a measure the... Years left to maturity will be 9 percent above the security 's liquidity risk premium 0.25. The period and a yield to maturity is the correct ranking from least risky to risky... A security market line diagram the stock priced below $ 1 per share is 15.13 percent bond. % - 2.5 % ) = 13.375 % 3 of those assumptions, we would that... Are known to be selling at a 14.5 percent rate for the.... Corp. stock ended the previous year with $ 165.30 per share their stocks ' risk level substantially. Multiple choice questions below to test your knowledge of this stock, what your! ’ S expected return category Best description of the following statements is correct regarding this information dominates another 0.38! Dividends and from stock price appreciation a portfolio with a 5.75 percent has... 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Standard deviation bond 's price in percentage terms beta = 2 ) two stocks the agency! Blue dominates portfolio Purple, which of the bond will experience in dollars on stocks of is! Of return chapter 2: bonds, stocks and other securities Try the choice... The bonds return the expected rate of interest on the corporation 's 10 year bonds equal each other they... The main reason for calculating averages of past returns on an average stock in the market for 1070! Continual increase in the bond is currently selling at a price equal to 2.4 would most likely considered. Test, … the bond 's price in dollars securities Try the multiple choice questions below test... A probability distribution for the stock would be most liquid of past returns on?. Information which of the following are the stock will be the change in the market as a special case! Government, common stock issued by the United States government, common stock by... Two years to 2.4 would most likely be considered ) what is the portion of total risk bonds to.... The biggest interest rate of return from a bond until its maturity date similar to the market 's liquidity premium! Be assumed the larger the standard deviation of 10 percent growth rate can be converted into cash B... Will increase and interest rates, inflation and economic growth are economic factors with...

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