Finance exam 2

Suppose Xanth co. were to issue a bond with 10 years to maturity. it has an annual coupon of $80. Similar bonds have a YTM of 8%. what will the bond sell for?

$1000

Suppose a corporate bond issued on March 21, 2021. The bond has a 8% semi-annual coupon and par value of $1000. This means six months later, on September 21, 2021, the bond will pay its first $40 coupon and on March 21, 2022, will pay its second $40 coupon. If you buy the bond on June8, 2021 (79 days since the bonds's last coupon payment on 3/21), how much will you have to actually pay i.e., what is the dirty price, assuming the YTM is 8%

$1017.56

Suppose Xanth co. were to issue a bond with 10 years to maturity. it has an annual coupon of $80. Similar bonds have a YTM of 8%. Now suppose a year goes by and market YTM has dropped to 6%. what is the bond worth now?

$1136.03

In order to accurately assess the capital structure of a firm. it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet is as follows: Long term debt (bonds at par): 23,500,000 Preferred stock: 2,000,000 common stock ($10 par): 10,000,000 retained earnings: $4,000,000 total debt and equity: $39,500,000 THe bonds have a 8.3% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years form today. The yield to maturity is 11%, so the bonds now sell below par. WHat is the current market value of the firm's debt?

$19,708,741.16

Olmstead Inc. purchased property for $1,432,000 million. The loan terms require monthly payments for 15 years at an APR of 7.572 percent, compounded monthly. What is the amount that contributes toward the principal payment in the second month?

$4,324.67

Find the price of a zero coupon bond, using semiannual periods, with 11 years to maturity when the yield to maturity is 5.38%.

$557.67

As of August 1, 2022, the bond had exactly 19 years to maturity remaining and 7.7% coupon rate with 9.2% yield to maturity. Suppose 43 days have passed since the last coupon payment. Assuming there are 180 days in 6 months, find the accrued interest to find the dirty price of the bond, i.e. the price you would actually pay.

$875.68

Suppose Xanth co. were to issue a bond with 10 years to maturity. it has an annual coupon of $80. Similar bonds have a YTM of 8%. One year goes by, with 9 years to maturity. if the interest rate in the market rose to 10%, what is the bond worth

$884.82

A 25-year, $1000 par value bond has an 8.5% annual payment coupon, the bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

$930.11

Zevon Inc.'s annual coupon bonds have a $1,000 par value, and they mature in 23 years. Their annual yield to maturity is 9.25%, and they currently sell at a price of $1027. What is the bond's annual interest payment?

$95.37

Assume that you are considering the purchase of a 24-year, noncallable bond with an annual coupon rate of 8.7%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.2% nominal yield to maturity on this investment, what is the price you should be willing to pay for the bond?

$951.93

Roadside markets has a 6.75% coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. what is the market price per bond if the face value is $1000 and the YTM is 7.2%

$967.24

A 23-year, $1,000 par value bond has 7.3% semiannual coupons. The bond currently sells for $984.36. If the yield to maturity remains at its current rate, what will the price be 7 years from now?

$986.75

What is the capital gains yield over a year on a 7.6% semiannual coupon bond with 19 years to maturity and current price of $935.21, assume that the YTM stays the same.

.16%

John Smith has $100,000 invested in a 2-stock portfolio. $62,500 is invested in Stock X and the remainder is invested in Stock Y. X's beta 1.5 and Y's beta is .7. what is the portfolio's beta?

1.2

Eswar Inc.'s stock has a 35% chance of producing a -7% return in an economic boom, a 41% chance of producing a 10% return in a normal economy, and a 24% chance of producing a 19% return in an economic recession. What is the firm's standard deviation of returns?

10.31%

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

10.66%

CDM Inc. recently issued bonds that mature in 17 years. They have a par value of $1,000 and an annual coupon of 11.8%. If the current market interest rate is 10.5%, what is the current yield of this bond? (Hint: current yield= annual coupon/price)

10.72%

Mauve Inc.'s outstanding bonds have a $1,000 par value, and they mature in 11 years. Their nominal annual yield to maturity is 11.7%, they pay interest semiannually, and they sell at a price of $943. What is the bond's coupon interest rate?

10.77%

PMW Co. has a semiannual coupon bond outstanding with 12 years to maturity, an 8.5% coupon rate, and a $1,000 par value. The bond has a 9.80% yield to maturity, but it can be called in 5 years at a price of $1,075. What is the bond's yield to call?

12.10%

Drake Machinery has 8.5% annual coupon bonds outstanding with a current market price of $932. The yield to maturity is 9.4 percent and the face value is $1,000. How many years is it until these bonds mature?

13.79 years

Olmstead Inc.'s stock has an expected return of 19.20%, a beta of 1.29, and is in equilibrium. If the risk-free rate is 3.00%, what is the market risk premium?

15.56%

Aliber Company's stock has a beta of 1.84, the risk-free rate is 3.15%, and the market risk premium is 7.30%. What is the firm's required rate of return?

16.58%

Olmstead Industry has 9.30% coupon bonds outstanding with a price of $1,023.58. Interest is paid semiannually and the yield to maturity is 8.25%. The par is $1,000. How many years is it until these bonds mature?

2.53 years

A taxable corporate bond currently yields at 8.7% and a municipal bond of similar maturity and risk is yielding 6.2%. What is the break even rate at which an investor would be indifferent between the two?

28.74%

Suppose bond price is $902.29, it has 10 years to maturity and a coupon rate of 6%. The payments are semi-annual. what is the bond yield?

3.7% semi annual 7.4% annual

Suppose 10% bonds had a deferred call provision that permitted the company, if desired, to call them 10 years later after their issue date at a price of $1100. Suppose that interest rates had fallen and that 1 year after issuance, the going interest rate had declines, causing their price to rise to $1494.93. Find YTC

4.21%

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,045. What is the bond's nominal yield to call?

5.59%

Eswar Inc.'s stock has a 35% chance of producing a -7% return in an economic boom, a 41% chance of producing a 10% return in a normal economy, and a 24% chance of producing a 19% return in an economic recession. What is the firm's expected rate of return?

6.21%

What is the coupon rate for semiannual coupon bond with YTM 8%, 10 years to maturity and current price of $962

7.44%

Z Pearls Co. have annual coupon bonds with interest payment of 7.80% every year. The bonds have a par value of $1,000, a current price of $1023.84, and mature in 19 years. What is the yield to maturity on these bonds?

7.56%

CoffeeWk Inc.'s bonds currently sell for $1,157 and have a par value of $1,000. They pay a $103 annual coupon and have a 20-year maturity, but they can be called in 9 years at $1,060. What is their yield to call (YTC)?

8.24%

Porter's inc's stock has an expected return of 12.5%, a beta of 1.25, and is in equilibrium. If the risk-fee rate is 2%, what is the market risk premium?

8.4%

The bonds issued by Stainless Tubs bear an 8% coupon, payable semiannually. the bonds mature in 11 years and have a $1000 face value. Currently, the bonds sell for $952. What is the YTM?

8.68%

A 30-year corporate bond has an annual coupon of 7%. The bond is currently selling at par. Which of the following statements is CORRECT? A. The bond's expected capital gains yield is zero. B. The bond's current yield is above 7%. C. The bond's current yield is less than its expected capital gains yield. D. If the bond's yield to maturity declines, the bond will sell at a discount. E. The bond's yield to maturity is above 7%.

A

A deferred call provision: A. requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called. B. prohibits the issuer from ever redeeming bonds prior to maturity. prohibits the bond issuer from redeeming callable bonds prior to a specified date. D. allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. E. requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called.

C

Which of the following statements is CORRECT? A. A zero coupon bond's current yield is equal to its yield to maturity B. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par C. All else equal, if a bond's yield to maturity increases, its price will fall D. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par E. All else equal, if a bond's yield to maturity increases, its current yield will fall

C

You observe the following information regarding Companies X and Y: - Company X has a higher expected return than Company Y. - Company X has a lower standard deviation of returns than Company Y. - Company X has a higher beta than Company Y. Given this information, which of the following statements is CORRECT? A. Company X's returns will be negative when Y's returns are positive. B. Company X has more diversifiable risk than Company Y. C. Company X has a lower coefficient of variation than Company Y. D. Company X has less market risk than Company Y. E. Company X's stock is a better buy than Company Y's stock.

C

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. Inflation increases significantly. C. Market interest rates drop sharply. D. The company needs more financing from the bond market. E. The company's financial situation deteriorates significantly.

C. Market interest rates drop sharply

10% bond, with semiannual coupons, face value of $1000, 20 years to maturity, $1197.93 price What is the current yield? What is the YTM? What is the capital gains yield?

Current yield: 8.35% YTM: 8% Capital gains yield: -.35%

Which of the following statements is CORRECT? A. Beta is measured by the slope of the security market line. B. If a company's beta doubles, then its required return will also double. C. If the risk-free rate rises, then the market risk premium must also rise. D. The slope of the security market line is equal to the market risk premium. E. If a company's beta is halved, then its required return will also be halved.

D

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Callable B. Warrant C. Mortgage D. Junk E. Zero coupon

E

You are comparing stock A to Stock B. Given the following information, what are the expected returns of these two securities? What are the Standard deviations? State of economy. Probability Firm A return. Firm B return Recession. 40% -12% 8% Boom 60% 18% -4%

Firm A: E(ri): 6& Standard deviation: 14.7% Firm B: E(ri): .8% Standard deviation: 5.88%

Suppose the returns for firm A and B's stocks are as before but we want to invest $3000 in stock an and $3000 in stock B. Find the expected return and standard deviation for the portfolio State of economy. Probability Firm A return. Firm B return. Portfolio return Recession. 40% -12% 8%. ? Boom 60% 18% -4% ?

Firm A: portfolio return= -2% Firm B: portfolio return: 7% E(r)= 3.4% standard deviation: 4.41%

Do zero-coupon bonds have reinvestment risk?

No because they have no interim coupon payments because they are fixed income

Assuminge that you are the portfolio manager of the SF fund, a $3 million hedge fund contains the following stocks. The required rate return on the market is 11% and the risk-free rate is 2%. What rate of return should investors expect (and require) on this fund? Stock Amount Beta a $1075000. 1.2 b 675,000. .5 c 750,000 1.4 d 500,000 .74 Total: $3,000,000

Portfolio beta= 1.2 E(rfund)= 11.18%

Suppose taxable bonds are currently yielding 8 percent, while at the same time, munis of comparable risk and maturity are yielding 6 percent. Which is more attractive to an investor in a 40 percent bracket? What is the break-even tax rate? How do you interpret this rate?

The munis is more attractive to an investor because these types of bonds are non-taxable at the federal level, so it would be better for someone in a high tax bracket At 25% tax rate the investor would be indifferent between the taxable bond and the munis

You have the following stock data: Stock S.D. Beta X 29%. .82 Y 18% 1.08 Z 25% 1.51 If Allie is a strict risk minimizer, she would choose Stock if it is held in isolation and choose Stock if it is held as part of a well-diversified portfolio.

Y;X

Suppose EIN co. issues $1000 face value, 5 year zero coupon bond. The initial price is $508.35. Using semiannual periods, verify that the bond yield about 14%

YTM= 14%

Which of the following statements is CORRECT? a. A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity b. if their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond c. A 10-year coupon bond would have more reinvestment risk than a 5- year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk d. a 10-year bond would have more price risk than a 5-year coupon bond, but all 10-year bonds have the same amount of price risk e. if their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond

b

Suppose you have two bonds with 12 years to maturity, with different coupon rates. Find the yield Coupon 1: 10% annual coupon rate and sells for $935.08 Coupon 2: 12% annual coupon rate and sells fro $1064.92

both= 11%

Which of the following statements is CORRECT? a. All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds b. all else equal, long-term bonds have less price risk than short-term bonds c all else equal, low-coupon bonds have less price risk than high coupon bonds d. all else equal, short-term bonds have less reinvestment risk than long-term bonds e. all else equal, long-term bonds have less reinvestment risk than short-term bonds

e

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation. true/false

false

Investors are interested in the past and therefore use historic return data to calculate the dispersion of returns as a measure of risk. true/false

false

Market risk refers to the tendency of a stock to move with the general stock market. A stock with below-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0. true/false

false

Standalone risk measures the volatility of returns for a portfolio of investments. True/false

false

Suppose a bond has a $1,000 par value, makes annual interest payments of $120, has 5 years to maturity, cannot be called, and is not expected to default. This bond should sell at a premium if market interest rates are above 12% and at a discount if interest rates are less than 12%. true/false

false

The primary purpose of portfolio diversification is to eliminate systematic risk. true/false

false

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away. true/false

true

Eliminating unsystematic risk is the responsibility of the individual investor. true/false

true

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk. true/false

true

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. true/false

true

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate. true/false

true

The market value of any real or financial asset, including stocks, bonds, or even art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present. true/false

true

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant. true/false

true