finance exam 2

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 11.9%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

5.30%

Koy Corporation's 5-year bonds yield 11.75%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?

5.85%

Malko Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

6.52%

Dyl Inc.'s bonds currently sell for $970 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

6.83%

Suppose the U.S. Treasury offers to sell you a bond for $687.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

7.79%

Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security?

8.80%

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.

Suppose a U.S. treasury bond will pay $4,475 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

$3534.23

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $825. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

$835.17

Your father is about to retire, and he wants to buy an annuity that will provide him with $78,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

$1,138,762.86

Grossnickle Corporation issued 20-year, noncallable, 7.1% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

$1,185.72

What is the PV of an annuity due with 5 payments of $4,200 at an interest rate of 5.5%?

$18,921.63

You just inherited some money, and a broker offers to sell you an annuity that pays $16,800 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

$209,365.13

You want to go to Europe 5 years from now, and you can save $7,300 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

$43,255.22

Suppose you inherited $575,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

$59,658.76

Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.1% with annual compounding?

$673.89

Last year Rocco Corporation's sales were $600 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

$802.94

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.7% on these bonds. What is the bond's price?

$987.92

Suppose the rate of return on a 10-year T-bond is 4.05%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS?

1.15%

Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 7.10%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

1.55%

Janice has $5,000 invested in a bank that pays 11.0% annually. How long will it take for her funds to triple?

10.53 years

Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 4.70% per year. What is the real risk-free rate of return, r*?

2.30%

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year. The bonds have a par value of $1,000, a current price of $1,470, and mature in 12 years. What is the yield to maturity on these bonds?

2.71%

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

20-year, zero coupon bond.

Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $3.60. What was the growth rate in earnings per share (EPS) over the 10-year period?

21.82%

5-year Treasury bonds yield 6.1%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?

3.80%

Adams Enterprises' noncallable bonds currently sell for $1,480. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

4.14%

Niendorf Corporation's 5-year bonds yield 11.25%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

5.25%

Which of the following factors would be most likely to lead to an increase in nominal interest rates?

A new technology like the Internet has just been introduced, and it increases investment opportunities.

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Adding a call provision.

Which of the following statements is CORRECT?

All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

Which of the following statements is CORRECT?

All else equal, if a bond's yield to maturity increases, its price will fall

Which of the following bank accounts has the highest effective annual return?

An account that pays 8% nominal interest with daily (365-day) compounding.

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Bond A's current yield is greater than that of Bond B.

Which of the following would be most likely to lead to a higher level of interest rates in the economy?

Corporations step up their expansion plans and thus increase their demand for capital

Which of the following statements is CORRECT?

If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.

Which of the following statements is CORRECT?

If a coupon bond is selling at par, its current yield equals its yield to maturity.

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?

If the pure expectations theory holds, the Treasury yield curve must be downward sloping.

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?

If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

Which of the following statements is CORRECT?

If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero?

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Market interest rates decline sharply.

Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public. Other things held constant, what would be the most likely effect on short-term securities' prices and interest rates?

Prices would decline and interest rates would rise.

Which of the following statements is CORRECT?

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

Which of the following statements is CORRECT?

Relative to a coupon-bearing bond with the same maturity, a zero-coupon bond has more price risk but less reinvestment risk.

Which of the following statements is CORRECT?

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

The discount rate increases.

Which of the following statements is CORRECT?

The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.

Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%

Which of the following statements is CORRECT?

The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

The required rate of return would increase because the bond would then be more risky to a bondholder.

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

The yield on a 10-year bond would be less than that on a 1-year bill.

Which of the following statements is CORRECT?

The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.

Which of the following statements is CORRECT?

Time lines are useful for visualizing complex problems prior to doing actual calculations