LOS a: Evaluate, using relative value analysis, whether a security is undervalued or overvalued.
Q1. The following are the yields on various bonds. The relevant benchmark is that of Treasury securities.
Treasury Bond Yield |
4.00% |
Bond Sector Yield |
4.50% |
Comparable Bond Yield |
6.00% |
ABC Bond Yield |
6.50% |
Is the ABC bond undervalued or overvalued and why? Using relative value analysis, the ABC bond is:
A) undervalued because its yield is greater than that of Treasuries.
B) undervalued because its spread is greater than that of comparable bonds.
C) overvalued because its spread is greater than that of comparable bonds.
Q2. The following are the yields on various bonds. The relevant benchmark is that of the bond sector.
Treasury Bond Yield |
3.00% |
Bond Sector Yield |
3.25% |
Comparable Bond Yield |
5.75% |
ABC Bond Yield |
5.50% |
Is the ABC bond undervalued or overvalued and why? Using relative value analysis, the ABC bond is:
A) undervalued because its yield is less than that of Treasuries.
B) undervalued because its spread is less than that of comparable bonds.
C) overvalued because its spread is less than that of comparable bonds.
Q3. The purpose of relative value analysis is to determine:
A) the return differential from riding the yield curve.
B) whether a bond is fairly valued using a benchmark yield.
C) whether a stock is fairly valued using present value calculations. |