İŞLETME FİNANSI I - Deneme Sınavı - 11

Cash flows available to the firm or to the shareholders after the company makes its capital expenditures are defined as free cash flows.

A bond is a debt security that contractually obligates the issuer to make fixed coupon payments at fixed intervals for a fixed amount of time plus it also pays out the face value of the bond at maturity together with the last coupon payment.

If market interest rates increase, the price of bonds decrease.

There is an inverse relationship between value of bonds and market interest rates. As market interest rates increase, the present value of future cash flows declines and the value of bond decreases. Conversely, if market interest rates decrease, the present value of future cash flows increases and the value of bond increases. It is important to note that market interest rates might change but there is no change in coupon interest rate.

Yield-to-maturity is the average rate of return that will be earned on a bond if it is bought at the market price and held until it matures. It is the discount rate that makes the present value of its future cash flows equal to its market price.

If the market rate of interest and the bond’s yield-to-maturity does not change over this period, then the bond’s rate of return will be equal to its yield-to-maturity.

The interest rates you observe in the world around you are typically nominal rates.

Yield curve plots the relationship between bond yields and maturity.

According to this model, the value of stock is equal to the present value of all future dividends that investors expect to get from that stock.

Bond prices fall when interest rates rise and bond prices rise when interest rates decrease.

It is not possible to know how much dividend the company will distribute in the future.

E(R_A)=R_F+B(E(R_M)-R_F) will give the expected return of asset A (R_A) given the expected market return (E(R_M)) and risk-free return (R_F). Thus:

12=6+(10-6)B

6=4B

1.5=B

Average rate = (0.05 + 0.07 + 0.09 + 0.03)/4 = 0.06

Variance=(1/4)*((0.05-0.06)²+(0.07-0.06)²+(0.09-0.06)²+(0.03-0.06)²)=(1/4)*(0.0001+0.0001+0.0009+0.0009)=0.0005

That is definition of correlation. If the correlation is negative then the prices or returns are moving in inverse directions, if the correlation is positive they are moving in same directions and if correlation is zero then there is no relation.

Expected return of a portfolio is the weighted average of returns of securities in that portfolio. The share of C=1-0.5-0.3=0.2

Thus, expected return will be:

ER=0.3*10+0.5*8+0.2*5=3+4+1=8%

Suppose that weight of X in portfolio is w. Then the weight of Y will be 1-w, given 0

since 0

multiplying all sides with 5: 0<5w<5

adding 5 to all sides:     5<5+5w<10. Thus the expected return of portfolio will be between 5 and 10. Therefore correct answer is D.

Combining assets with negaive correlation decreases both the risk and rate of return of a portfolio.

The risk which can be diminished by diversification is called unsystematic risk because the source of the risk is not the market.

Beta measures the co-movement of a securities returns with the market return. It is stimated by standardizing the covariance between a given security and market portfolio with the variance of the market.

The securities above the security market line (SML) are over-valued. So A and B are overvalued, D and C are under-valued, E is correctly valued.