Last year exam question!!

Does anybody remember the quant section on the 2009 Level II exam where they provided R squared numbers and you had to determine the correlation? Was the answer negative or positive correlation?? How did you determine that?

I don’t know the question but if they give you R^2, take the st dev. and use the sign from the slope

it was negative for reasons that NE Student gives.

iy was negative and I botched it and failed the quant section I also remember a question where they gave two interest rates in a scanario with bonds and askes something like which one you should use. I know I am being very vague but does anyone remember this.

you had to find wacc and they gave company’s yield on bonds and coupon rate. i beleive you have to use yield.

use the sign from the slope…?

Na na u just take the sq rt of r squared.

I also fell for the trap and just took the positive square root number. I think the answer was negative.

the show NY Wrote: ------------------------------------------------------- > you had to find wacc and they gave company’s yield > on bonds and coupon rate. i beleive you have to > use yield. When do you use the coupon rate and when do you use the company’s yield on bonds? I did a Schweser Book 2 exam 3 and they asked you to caculate the WACC and gave you the coupon rate. As they didn’t give the yield I just used the coupon rate as the before-cost of debt. Do you use the coupon rate when the bond was sold at par? And you use yield rate when bond is sold at discount/premium?

Ideally you would want to use the YTM on the most recent debt issue. Basically you’re getting the market rate on the company’s debt. YTM is essentially a bond holder’s required rate of return K(d), on new debt at least, much like K(e) for equity holders. If all they give you is the coupon then that’s all you have.

i think chuck’s right but im not positive. i would think you want to use the rate on the marginal rate of debt.

The yield is the most recent cost of debt. The coupon rate is a stale price plus you don’t know if the issuer issued that bond at a premium or discount to market so using just the coupon rate is no good. I’m sure they won’t ask the same question twice but maybe it will be smuggled in under some other question that needs a WACC.