Question

1. Yesterday I bought shares in Kellogg's stock. Today, Kellogg's stock increased by 3% while the overall market (the S&P 500) went up by 1% based on a positive press release which indicating Kellogg’s would have lower expenses over the next year. Since Kellogg’s went up buy more than the overall market, it was undervalued yesterday which proves markets are not efficient. True or False?

2. You have just purchased a 9% coupon bond with 25 years remaining until maturity for $1131.25. The bond is callable in 5 years for $1045. Based on this, the Yield-to-Call is:

- 6.65%

- 7.85%

- 7.80%

- 5.93%

- None of the answers are correct

Answer 1

1)

This statement is false as it doesn't proves markets are inefficient. This is because keyloggs is just a part of S&P 500 index and the index incudes many companies from many sectors. It is possible that on a particular day, a company is making losses while other is in profits. One company can beat the market return on a particular day but it cannot constantly beat the market on a daily basis that is the point.

2 ) this can be calculated on a financial calculator with following key strokes :-

FV = $1045

PV = - 1131.25

Pmt = 90

N = 25

Compute I/Y = 6.65%

I hope this helps

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