If Stock Prices Are In-Line with Their Fundamental Determinants and Interest

question 9

Multiple Choice

If stock prices are in-line with their fundamental determinants and interest rates do not change, then a change in the profit expectations by 20%

• A)will change the stock price by exactly 20% regardless of the expected distribution of the earnings over time.
• B)will change the stock price by less than 20% regardless of the expected distribution of the earnings over time.
• C)will change the stock price by more than 20% regardless of the expected distribution of the earnings over time.
• D)will change the stock price by more or less than 20% depending on the expected distribution of the earnings over time.

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Definitions:

Mortgages

Loans specifically created for purchasing real estate, secured by the property itself, which is to be repaid along with interest over a predetermined period.

Mortgage-backed CDOs

Collateralized debt obligations that are secured by mortgage-backed securities as the underlying assets.

Asset

An economic resource that is expected to provide benefits to the owner in future periods.

Default Risk Premiums

The additional yield that investors require to hold debt that has a risk of default over a risk-free debt instrument.