Corporate Finance Chapters 6-10

As a Stock Analyst you have developed a strong analytical model to estimate a stock's value. The model works like this. Stock Price Valuation = (Net Income per share * Industry Average PE) * (Industry Average Debt Ratio/ company debt ratio) RDM Corporation had Net Income of $1,000,000 and has 100,000 shares outstanding and a debt ratio of 55%. The industry average PE = 24 and average debt ratio of 45% What is the Stock Price Valuation? Current market price is $190 What recommendation would you give on RDM?

1,000,000/100,000=10*24=240*.45/.55=196.36 buy

Bond Valuation: Easy Motors' bonds have 3 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 8%, and the yield to maturity is 6%. What is the current market price? (hint PV)

1053.44

Callaghan Motors' bonds have 4 years remaining to maturity. Interest is paid annually, they have a $1,000 par value the coupon rate is 8% and the required yield to maturity is 6%. What is the current market price?

1069.31

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 8%, and the required yield to maturity is 6%. What is the current market price?

1084.90

Suppose a State of Indiana discount bond will pay $20,000 ten years from now. If the required yield on these types of bonds is 7%, how much is the bond worth today? (A discount bond only pays the par value of the bond at the due date)

20,000*.5083=10,166

You have determined that the present value of the free cash flows of corporation ZK is $500M. ZK has $75M of debt, sales of $750M and $135M of assets. ZK also has 25M shares outstanding. What is the value per share of ZK in your analysis?

500-75=425/25=17

As a stock analyst you have used your special software program to estimate that corporation RR has a present value of the free cash flows $700M. RR has $200M of debt. RR also has 10M shares outstanding. RR is currently selling on the stock market for $55 per share. Would you recommend that your clients buy RR stock?

700-200=500/10=50 do not buy the stock

Ryngaert Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

859.48

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 8%, and the required yield to maturity is 10%. What is the current market price?

924.16

Callaghan Motors' bonds have 4 years remaining to maturity. Interest is paid annually, they have a $1,000 par value the coupon rate is 8% and the required yield to maturity is 10%. What is the current market price?

936.59

What price should you pay for a Corporate Bond with a $1,000 par value, maturing 3 years from now, with a coupon rate of 7%?

949.39

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 8%, and the required yield to maturity is 9%. What is the current market price?

961.076

As a Stock Analyst you have developed a strong analytical model to estimate a stock's value. The model works like this. Stock Price Valuation = (Net Income per share * Industry Average PE) * (Industry Average Debt Ratio/ company debt ration) RDM Corporation had Net Income of $4,000,000 and has 100,000 shares outstanding and a debt ratio of 50%. The industry average PE = 14 and average debt ratio of 45% What is the Stock Price Valuation? (4pts) Current market price is $480 What recommendation would you give on RDM (Overvalued (Sell) or Undervalued (BUY)?

NET INCOME PER SHARE=4,000,000/100,000=40*14*(.45/.5)=504 PER SHARE UNDERVALUED (BUY)

You have had success investing in companies with a lower than average P/E ratio. TRAC Corporation is expected to generate $5 earnings per share this year. The stock is currently selling for $65 per share. TRAC has similar characteristics to other companies in its industry. The Industry average P/E ratio is 14. Would you say the current TRAC stock price is over or under valued by the market? Would you invest in TRAC?

P/E=65/5=13 -> under the average which means buy. stock should rise such that the PE=14. at a stock price of $70 the PE would be 14. the stock is $5 undervalued

As a stock analyst you have estimated the present value of future cash flows for KBM Corporation to be $100B. KBM Corporation has $25B in debt and had sales of $200B last year. KBM Corporation has 5B of shares outstanding. The market price of shares = $12 per share. a) You should buy KBM shares because the market price is lower than your estimated value b) You should not buy KBM shares because the market price is higher than your estimated value c) You should buy KBM shares because Sales are above $200B

a) You should buy KBM shares because the market price is lower than your estimated value

Using the Capital Asset Pricing Model. Lego is considering an investment in Disney corporation. The risk free rate is 5% and the Beta for Disney is 1.2. Lego requires a market premium of 10%. What percent return does Disney need to earn to trigger a Lego investment? Select one: a.11% b.5% c.12% d.10%

a. 11%

As a stockholder in a corporation you do own a portion of the Corporation. a. true b. false

a. true

Because estimating a corporation's free cash flow in the future is very complicated, a stock analyst's job is difficult. a. true b. false

a. true

During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining. a. true b. false

a. true

If investors expect the rate of inflation to increase sharply in the future, then we should not be surprised to see an upward-sloping yield curve. a. true b. false

a. true

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength. a. true b. false

a. true

The "yield curve" shows the relationship between bonds' maturities and their yields. a. true b. false

a. true

The FED drops interest rates when the economy appears to be entering a recession. a. true b. false

a. true

The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak. a. true b. false

a. true

The Present Value of the free cash flows of a corporation minus the debt is a way to determine the value of the corporation. a. true b. false

a. true

The discount dividend model is sometimes used to value a Corporation, however it has limited usefulness because all corporations don't pay dividends. a. true b. false

a. true

The lower (worse) a bond rating the higher the required yield. a. true b. false

a. true

The risk that interest rates will decline, and that decline will lead to a decline in the income provided by a bond portfolio as interest and maturity payments are reinvested, is called "reinvestment rate risk." a. true b. false

a. true

The stockholders determine the Board of Directors for a Corporation. a. true b. false

a. true

When inflation is high, generally speaking interest rates are high a. true b. false

a. true

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 5%, and the required yield to maturity is 6%. What is the current market price? a.$957.88 b.$1,043.29 c.$990.41 d.$2,543.45

a.$957.88

During periods on economic expansion the Federal Reserve is likely to Select one: a.Increase interest rates to keep the expansion from over heating b.The Federal Reserve will likely increase the money supply c.The Federal Reserve has no impact on interest per the Dodd-Frank act d.Decrease interest rates to keep the expansion from over heating

a.Increase interest rates to keep the expansion from over heating

What could be said about current interest rates? Select one: a.Interest rates have been historically low for about 12 years b.Interest rates have recently increased because China dominates the world economy c.The FED has recently increased interest rates to fight the coronavirus d.Interest rates while currently low, are still higher that experienced in the early 80's

a.Interest rates have been historically low for about 12 years

An investor who is solely invested in safe low interest paying investments. a.may actually be losing money due to the effects of inflation b.can write off interest received on his taxes c.is sure to have a very large cushion for retirement.

a.may actually be losing money due to the effects of inflation

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security? a. 5.08% b. 5.35% c. 5.62% d. 5.90% e. 6.19%

b. 5.35%

Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. Households start saving a larger percentage of their income. b. Corporations step up their expansion plans and thus increase their demand for capital. c. The level of inflation begins to decline. d. The economy moves from a boom to a recession. e. The Federal Reserve decides to try to stimulate the economy.

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

The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions, which of the following statements is CORRECT? a. The yield on a 2-year T-bond must exceed that on a 5-year T-bond. b. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond. c. The conditions in the problem cannot all be true--they are internally inconsistent. d. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.

b. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond.

A bond ($1,000 par value) with a coupon rate of 8% will sell for more than $1,000 when interest rates on similar bonds are 10%. a. true b. false

b. false

Par Value is the amount of interest paid on a bond a. true b. false

b. false

Stock Holders have no power in a corporation. a. true b. false

b. false

Suppose the federal deficit increased sharply from one year to the next, and the Federal Reserve kept the money supply constant. Other things held constant, we would expect to see interest rates decline. a. true b. false

b. false

The Board of Directors of a corporation is elected by the management team. a. true b. false

b. false

The Present Value of the free cash flows of a corporation minus the Fixed Assets plus the sales is a way to determine the value of the corporation a. true b. false

b. false

The Yield Curve is downward sloping most of the time as determined by the Dodd-Frank act of 1880. a. true b. false

b. false

The coupon rate is the amount a bond will pay at maturity. a. true b. false

b. false

When a bond's price increases this means that the market rate of interest is also increasing. a. true b. false

b. false

Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 6.50%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Select one: a.13.54% b.11.10% c.8.77% d.10.21% e.10.88%

b.11.10% Real risk-free rate, r* 4.20% Inflation 6.50% MRPYears:4Per year:0.10% 0.40% Yield on t-year T-bond = r* + IPt + MRPt

The current T-Bill rate is 1.5%. The estimate for inflation is 2%. The Default Risk premium is 2% for class AA bonds and 4% for class BB bonds. The Liquidity premium for Well Fargo bonds is 1%. What is the required yield for Wells Fargo bonds which are rated AA? a.5.5% b.6.5% c.not enough data d.4%

b.6.5%

Which of the following factors would be most likely to lead to an increase in nominal interest rates? Select one: a.Households reduce their consumption and increase their savings. b.A new technology like the Internet has just been introduced, and it increases investment opportunities. c.There is a decrease in expected inflation. d.The economy falls into a recession. e.The Federal Reserve decides to try to stimulate the economy.

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

Huck Finn is thinking about purchasing some stock in Mississippi Mining Company (MMC). Huck uses the price/earnings ratio technique when purchasing stock. MMC stock is currently selling for $100 per share. MMC is expected to generate a profit of $10 per share this year. The industry averages a P/E of 9.5. Huck considers MMC to be approximately equal to other companies in its industry. Select one: a.Huck should buy MMC stock as its selling at a discount to the market b.Huck should not buy MMC stock as its already selling at a premium to the market c.Not enough information to calculate P/E for MMC d.MMC is not making any profit so he shouldn't buy that stock

b.Huck should not buy MMC stock as its already selling at a premium to the market

MI6 is considering investing in Hi-Tech Security corporation. MI6 uses the corporate valuation model to estimate a value of a corporation. MI6 believes that Hi-Tech a present value of future cash flows equal to $500M. Hi-Tech has $100M in debt and has 20M shares outstanding. The current market price for MI6 is $17 per share. Select one: a.MI6 does not have any cash to invest b.MI6 should make the investment as the corporate valuation model price is higher than the market price c.MI6 should not make the investment as the corporate valuation model price is lower than the market price d.MI6 should not make the investment as the corporate valuation model price is higher than the market price

b.MI6 should make the investment as the corporate valuation model price is higher than the market price

007 Company has issued a new corporate Bond. This bond is considered high risk and has been rated BBB by S&P. The Par value of the bond is $1,000 and it has a coupon of 4%. James is considering buying this bond. The current market rate for this type of bond is 9%. What can you advise James? Select one: a.Since the bond has just been issued it is worth the face value b.Since the bond pays 4% coupon interest and the required yield is 9%, James should pay less that $1,000 for the bond. c.James should pay $1,004 for the bond to ensure the issuer gets the correct interest. d.Since the bond pays 4% coupon interest and the required yield is 9%, James should pay at least $1,000 for the bond.

b.Since the bond pays 4% coupon interest and the required yield is 9%, James should pay less that $1,000 for the bond.

Which of the following statements is CORRECT? a.The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond. b.The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond. c.The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. d.The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond. e.The following represents a "possibly reasonable" formula for the maturity risk premium on bonds: MRP = -0.1%(t), where t is the years to maturity.

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

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security? a. 5.14% b. 5.42% c. 5.70% d. 5.99% e. 6.28%

c. 5.70%

Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company's bonds are downgraded. b. Market interest rates rise sharply. c. Market interest rates decline sharply. d. The company's financial situation deteriorates significantly. e. Inflation increases significantly

c. Market interest rates decline sharply.

ABC company is going to issue new 12 year corporate bonds which have a coupon rate equal to today's required yield for these types of bonds. ABC management believe that interest rates will drop significantly in the next few years. What bond provision should ABC consider adding? Select one: a.a default provision b.a banker's right provision c .a callable provisiond.a guarantee provision

c. a callable provision

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter? Select one: a.Either A or B, i.e., the investor should be indifferent between the two. b.Stock A. c.Stock B. d.Neither A nor B, as neither has a return sufficient to compensate for risk. e.Add A, since its beta must be lower.

c. stock B

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 4%, and the required yield to maturity is 3%. What is the current market price? Select one: a.$990.41 b.$955.48 c.$1,045.80 d.$1,205.41

c.$1,045.80

Harvey is thinking about buying the stock of Giant Bunny corporation. Harvey uses the Dividend Model to estimate stock value. Harvey requires a 10% rate of return on his stock investments. Giant Bunny pays a $4 dividend every year and that amount is expected to continue. What should Harvey be willing to pay for a share of Giant Bunny? a.$80 b.$10 c.$40 d.$20

c.$40

Callaghan Motors' bonds have 5 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon rate is 2%, and the required yield to maturity is 5%. What is the current market price? a.$788.84 b.$1,141.40 c.$870.12 d.$3,450.95

c.$870.12

Company RR has a Beta of 1.5. The overall stock market returned 8%, what would you expect for Company RR? Select one: a.Company RR would have a lower return than 8% b.Company RR would go bust due to over expansion of the market c.Company RR would have a return higher than 8% d.Company RR shareholders would sell all shares

c.Company RR would have a return higher than 8%

Which of the following statements is CORRECT, other things held constant? a.If companies have fewer good investment opportunities, interest rates are likely to increase. b.If individuals increase their savings rate, interest rates are likely to increase. c.If expected inflation increases, interest rates are likely to increase. d.Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. e.Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

c.If expected inflation increases, interest rates are likely to increase.

After Tax Cost of Debt equals a.Corporate interest rates are always 3 times the risk free rate b.Interest * the tax rate - the cost of capital c.Interest rate on debt - tax savings d.WACC * the tax rate - interest payments to the nth power

c.Interest rate on debt - tax savings

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? Select one: a.The bond's coupon rate exceeds its current yield. b.The bond's current yield exceeds its yield to maturity. c.The bond's yield to maturity is greater than its coupon rate. d.The bond's current yield is equal to its coupon rate. e.If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.

c.The bond's yield to maturity is greater than its coupon rate.

Which of the following statements is CORRECT? a.The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. b.The most likely explanation for an inverted yield curve is that investors expect inflation to increase. c.The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. d.If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. e.Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

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

Inflation, recession, and high interest rates are economic events that are best characterized as being Select one: a.systematic risk factors that can be diversified away. b.company-specific risk factors that can be diversified away. c.among the factors that are responsible for market risk. d.risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. e.irrelevant except to governmental authorities like the Federal Reserve.

c.among the factors that are responsible for market risk.

RBC Corporate bonds have a coupon rate of 8%, 5 years to maturity, and a $1,000 par value and an A rating. Bonds with a AA rating are trading at 4.5% Bonds with an A rating are trading at 5% Bonds with a AAA rating are trading at 4% What is the market price of RBC's Bonds a.$10,452.98 b.$880.22 c.$1,235.80 d.$1,129.88

d.$1,129.88

If you had invested $10,000 in Ford common stock on 1/1/2009, how much money would you have had on 12/31/2009? The Stock sold on 1/1/09 for approximately 2.30 per share and on 12/31/2009 it sold for approximately 7.75 per share. Select one: a.$336,670 b.$3,336,700 c.$10,336 d.$33,670

d.$33,670

Bill Dukes has $100,000 invested in a 2-stock portfolio. $77,500 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta? Select one: a.1.45 b.1.58 c.1.65 d.1.32 e.1.06

d.1.32

Niendorf Corporation's 5-year bonds yield 9.50%, 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? Select one: a.2.63% b.3.54% c.3.05% d.3.50% e.4.10%

d.3.50% Basic equation: r = r* + IP + MRP + DRP + LP.Years to maturity: 5 MRPIn both bonds, so not needed in this problem0.40%IPIn both bonds, so not needed in this problem1.65%r*In both bonds, so not needed in this problem2.75%rNie 9.50%rT-bond 4.80%DRPIncluded in corp. only1.20% LP = rNie - rT-bond - DRP3.50%

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Select one: a.4.62% b.4.96% c.6.04% d.5.70% e.6.67%

d.5.70% Real risk-free rate, r* 3.00% Inflation 2.60% MRPYears:1 Per year:0.10% 0.10%1-year bond yield: rRF = r* + IP + MRP

The FED recently announced its intention to drastically reduce interest rates to try and mitigate the impact of a pandemic on the economy. What will happen to Bond Prices? Select one: a.Bond prices will fall b.Bond prices will not change c.The FED by Law (Sarbanes Oxley) cannot change interest rates d.Bond prices will rise

d.Bond prices will rise

Investment Grade bonds or those bonds with a.Bonds rated AAA or higher b.Bonds rated Class C for corporate grade c.Bonds rated III for Investment grade d.Bonds rated BBB or higher

d.Bonds rated BBB or higher

C3PO has decided to only purchase stocks with a Beta above 1.5, Select one: a.He should expect his portfolio to move less than the market as a whole b.Since his BETA is high his ALPHA will also be high. c.He should expect his portfolio to track closely with the market as a whole d.He should expect his portfolio to have more volatility than the market as a whole

d.He should expect his portfolio to have more volatility than the market as a whole

WACC stands for Select one: a.Weighted Across Capital Constraints b.Winding Across Country Constraints c.Withholding Across Cross Country d.Weighted Average Cost of Capital

d.Weighted Average Cost of Capital

Stockholders have the right to a.get profit sharing and bonuses b.demand interest payments from the company c.get free products d.elect the Board of Directors

d.elect the Board of Directors

XYZ Corporation has the following information: Total Assets = $1,000 Debt = $450 Equity = $550 Cost of Debt =6% Tax Rate = 34% Cost of Equity = 14% What is the Weighted Average Cost of Capital for TRX in %?

debt%=450/1000=45% equity%=550/1000=55% WACC=.45*.06*(1-.34)+.55*.14=9.48%

You use the dividend model to estimate the price of a stock. Company SPG will pay a dividend of $6.00 per share this year. You expect a stock with characteristics like SPG to generate a return of 9%. Using the dividend model what is the price you should pay for this stock? The dividend has been growing at 3% per year. What is your valuation of the stock of SPG Company?

dividend=D*(1+g)/k-g 6*(1+.03)/.09-.03=6.18-.06=103

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 4.10%. What rate of return would you expect on a 5-year Treasury security? a. 5.38% b. 5.66% c. 5.96% d. 6.27% e. 6.60%

e. 6.60%

Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 4.50% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average. Select one: a.2.03% b.2.70% c.2.13% d.2.60% e.2.50%

e.2.50% 1-year T-bill rate7.00% Inflation4.50% Difference = real risk-free rate, r*

Which of the following statements is CORRECT? Select one: a.An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks. b.The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. c.It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock. d.Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. e.An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

e.An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

Which of the following statements is CORRECT? Select one: a.If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b.The total yield on a bond is derived from dividends plus changes in the price of the bond. c.Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns. d.Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e.The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

e.The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.) Select one: True False

false

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline. Select one: True False

false

What happens to a bond's yield to maturity in these cases (increase or decrease) The bond's price decreases The bond is downgraded by a rating agency The US bankruptcy laws are changed such that bond holders are paid before everyone else in case of bankruptcy. You discover that the bond is callable

increase increase decrease increase

Given that you invest using a risk weighted judgment. Which of these would you pick? Option A. Treasury Bills with a likely return of 3%. Option B. Corporate Bonds with a 25% likelihood of 4%, a 50% likelihood of 5%, a 25% likelihood of 2%. Option C. Mutual Fund with a 25% likelihood of 6%, a 50% likelihood of 8%, a 25% likelihood of -5%

option A=3% option B=(.25*.04)+(.5*.05)+(.25*.02)=4% option C=(.25*.06)+(.5*.08)+(.25*-.05)=4.25% pick option C

Using the following formula r= r* + IP + DRP + LP + MRP If r* = 2.5%, IP = 3%, DRP = 1%, LP = 2% and MRP = is .5% in total. Note: r = the required yield to maturity

r=9%

An upward-sloping yield curve is often call a "normal" yield curve, while a downward-sloping yield curve is called "abnormal." Select one: True False

true

Wabash National Corporation has a Beta of 1.9. The overall stock market jumped by 2% today. Would you expect the stock price of Wabash National Corporation to increase by less or greater than 2%?

you would expect the price to move more than the market