FIN 571 Week 1 DQ 2
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Assume that interest rates have increased substantially. Would this tend to increase or decrease
the market value (meaning the price an investor in the firm's paper is willing to pay) of a firm’s liabilities (relative to the book value of liabilities)?
This question is referring to a firm's liability such as a bond or debenture that has been issued in the markets. What happens to the price an investor who is looking to purchase that bond or debenture is willing to pay if the market interest rate increases above the rate that the bond or debenture pays.
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FIN 571 Week 2 DQ 1
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In order to receive proper credit, please reply to this message when posting your answers to WK2 DQ1.
• Suppose you own $1 million worth of 30-year Treasury bonds. Is this asset riskless?
• You own $1 million worth of 90-day Treasury bills. You “roll over” this investment every 90 days by reinvesting the proceeds in another issue of 90-day Treasury bills. Is this investment riskless?
• Can you think of an asset that is truly riskless?
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FIN 571 Week 2 DQ 2
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Suppose rf is 5% and rM is 10%. According to the SML and the CAPM, an asset with a beta of −2.0
has a required return of negative 5% [= 5 − 2(10 − 5)]. Can this be possible? Does this mean that
the asset has negative risk? Why would anyone ever invest in an asset that has an expected and
required return that is negative? Explain...