BUS 410 Ch. 3 Interest Rates & Security Valuation || Questions and
Answers.
4 interest rate measures correct answers coupon rate, required rate of return, expected rate of
return, realized or actual rate of return
what is the coupon rate? correct answers interest rate on a bond instrument used to calculate the
annual cash flow the bond issuer promises to pay the bond holder
what is required rate of return? correct answers interest rate an investor should receive on a
security given its risk. used to calculate the fair PV on a security.
what is expected rate of return? correct answers interest rate an investor expects to receive on a
security if he buys the security at its current market price, receives all expected payments, and
sells security at end of his investment horizon.
what is realized or actual rate of return correct answers actual interest rate earned on an
investment in a financial security. = historical (ex post) measure of the interest rate.
the required rate of return is the interest rate used to find ____ correct answers the fair PV of a
financial security - interest rate investor SHOULD receive on security given its risk (ex ante -
before the fact - measure of interest rate on a security)
the riskier the bond, the ____ the coupon will get correct answers higher
once a PV is calculated, market participants compare this PV with current market price at which
security is trading. If current market price is less than the fair value, then the security is currently
_____ correct answers undervalued - participant would want to buy more of this security @ the
current price
, if current market price is greater than PV calculated, security is ___ correct answers overvalued -
would not want to buy at its current price
the expected rate of return is the interest rate a market participant ____ correct answers expects
to earn by buying the security at its current market price, receiving all projected cash flow
payments, and selling the security at the end of the participant's investment horizon. (ex ante
measure of interest rate) - used to find current market price - based on current market price rather
than fair PV
expected rate of return is the discount rate in the PV equation that makes the PV of projected
cash flows ____ correct answers equal to its current market price
if expected rate of return is greater than required rate of return, the projected cash flows on the
security are _____ correct answers greater than is required to compensate for the risk incurred -
would want to buy more of this security
if expected rate of return is less than required rate of return, projected cash flows are ___ correct
answers less than those required to compensate for the risk involved- market participant would
not want to invest in the security
two ex ante (before the fact) measures of interest rates correct answers required & expected
required rate used to calculate a correct answers fair PV of a security
expected rate is correct answers a discount rate used in conjunction with current market price of
a security
if markets are efficient then what two things are equal? correct answers current market price
tends to equal its fair PV (usually the case) - markets are efficient when everyone has access to
information
Answers.
4 interest rate measures correct answers coupon rate, required rate of return, expected rate of
return, realized or actual rate of return
what is the coupon rate? correct answers interest rate on a bond instrument used to calculate the
annual cash flow the bond issuer promises to pay the bond holder
what is required rate of return? correct answers interest rate an investor should receive on a
security given its risk. used to calculate the fair PV on a security.
what is expected rate of return? correct answers interest rate an investor expects to receive on a
security if he buys the security at its current market price, receives all expected payments, and
sells security at end of his investment horizon.
what is realized or actual rate of return correct answers actual interest rate earned on an
investment in a financial security. = historical (ex post) measure of the interest rate.
the required rate of return is the interest rate used to find ____ correct answers the fair PV of a
financial security - interest rate investor SHOULD receive on security given its risk (ex ante -
before the fact - measure of interest rate on a security)
the riskier the bond, the ____ the coupon will get correct answers higher
once a PV is calculated, market participants compare this PV with current market price at which
security is trading. If current market price is less than the fair value, then the security is currently
_____ correct answers undervalued - participant would want to buy more of this security @ the
current price
, if current market price is greater than PV calculated, security is ___ correct answers overvalued -
would not want to buy at its current price
the expected rate of return is the interest rate a market participant ____ correct answers expects
to earn by buying the security at its current market price, receiving all projected cash flow
payments, and selling the security at the end of the participant's investment horizon. (ex ante
measure of interest rate) - used to find current market price - based on current market price rather
than fair PV
expected rate of return is the discount rate in the PV equation that makes the PV of projected
cash flows ____ correct answers equal to its current market price
if expected rate of return is greater than required rate of return, the projected cash flows on the
security are _____ correct answers greater than is required to compensate for the risk incurred -
would want to buy more of this security
if expected rate of return is less than required rate of return, projected cash flows are ___ correct
answers less than those required to compensate for the risk involved- market participant would
not want to invest in the security
two ex ante (before the fact) measures of interest rates correct answers required & expected
required rate used to calculate a correct answers fair PV of a security
expected rate is correct answers a discount rate used in conjunction with current market price of
a security
if markets are efficient then what two things are equal? correct answers current market price
tends to equal its fair PV (usually the case) - markets are efficient when everyone has access to
information
