finance exam 3

An example of an illiquid asset is _____________________.

Common stock issued by a small but financially strong firm

Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

indenture

This is the continual increase in the price level of a basket of goods and services.

inflation

primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We refer to these first-time issues as

initial public offerings

Which of the following statements is true?

Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

The bond's annual coupon rate divided by its market price is referred to as the __________.

Current Yield

Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

term structure of interest rates

A bond's current yield is defined as

the bond's annual coupon rate divided by the bond's current market price.

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

the municipal bond

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

the municipal bond

A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?

the municipal bond

Which of the following bonds makes no interest payments?

zero coupon bond

Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

$1,220.93; premium

Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

$1029.38, $994.50, $5122.50, respectively

A 3 3/4 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

$1181.46, $22.15, respectively

A 2½ percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

$1207.16, $15.09, respectively

A 7.5% coupon bond with 9 years left to maturity is priced to offer a 10.4% yield to maturity. You believe that in one year, the yield to maturity will be 8%. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

$137.75

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5%. (Assume annual compounding and a par value of $1,000.)

$195.62

A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

$21.55

A 3.75% TIPS has an original reference CPI of 183.9. If the current CPI is 214.7, what is the current interest payment? (Assume semi-annual interest payments and a par value of $1,000.)

$21.89

An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to maturity. You believe that in one year, the yield to maturity will be 6.5%. What is the change in price the bond will experience in dollars? (Assume annual interest payments and par value is $1,000.)

$215.82

A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be called in 7 years and if called would generate a yield to call of 5.75%. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

$219.73

Consider a 3.25% TIPS with an issue CPI reference of 186.7. At the beginning of this year, the CPI was 197.5 and was at 202.4 at the end of the year. What was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and $1,000 par value.)

$26.25

Determine the interest payment for the following three bonds: 5½ percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

$27.50, $32.25, $0, respectively

A 15-year bond with a 10% coupon has a yield to maturity of 8%. The bond could be called in 4 years and if called would generate a yield to call of 6%. What is this bond's call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

$41.20

Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?

$5,062.50

Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

$553.68

Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

$685.93; discount

Calculate the price of a zero coupon bond that matures in 5 years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)

$692.02

Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?

$75.85

A 5 1/8% TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

$981.75

which of the following is not a money market instrument?

-corporate bonds

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

interest rate risk

in the u.s, these financial institutions arrange most primary market transactions for businesses

investment banks

Suppose we observe the following rates: 1R1 = 6%, 1R2 = 7.5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)? A. 6.75%

9.02

If a bond is selling at a premium, then ________________________________.

its coupon rate must be greater than its yield

A corporate bond with a 5% coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0%. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9%. What will be the change in the bond's price in dollars? Assume interest payments are paid semi-annually and par value is $1,000.

-$56.31

. A corporate bond with an 8.5% coupon has 10 years left to maturity. It has had a credit rating of A and a yield to maturity of 10%. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will be 11.5%. What will be the change in the bond's price in dollars? Assume interest payments are paid semi-annually and par value is $1,000.

-$82.13

One-year Treasury bill rates in 20XX averaged 5.15% and inflation for the year was 7.3%. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect.

-2.15

Determine the interest payment for the following three bonds: 2½ percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

. $12.50, $15.75, $0, respectively

Which of the following is true regarding U.S. Government Agency Securities?

. They do not carry the federal government's full faith and credit guarantee.

A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

10 years

A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

1045

A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

1055

A 6 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

1060

A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

11.00

A 6.75% coupon bond with 13 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

14.54%

A 6.5% coupon bond with 12 years left to maturity can be called in 4 years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semi-annually and par value is $1,000.)

2.96

Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually), 4.75 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

20.00, $23.75, $0, respectively

Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

27.69

Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%?

30-year, zero coupon

Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon, 2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.

30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5% coupon bond

A 4.25 percent coupon bond with 8 years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

4.50

Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

4.62%

A 5% coupon bond has 10 years to maturity and could be called in 2 years. If the bond is called, investors will earn 6.2%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

4.72%

A 4.75 percent coupon bond with 12 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

5.05

A 3.25 percent coupon municipal bond has 12 years left to maturity and has a price quote of 98.75. The bond can be called in 5 years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 35 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

5.20

A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

5.3

A 6.75 percent coupon bond with 10 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.65 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

5.5

What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

5.56%

What's the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?

5.58

A 7% coupon bond has 10 years to maturity and could be called in 3 years. If the bond is called, investors will earn 5.5%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

5.69%

Reconsider a 3.25% TIPS that was issued with CPI reference of 186.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the end of the year, the CPI is 202.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments and $1,000 par value.)

5.8

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

5.9%

A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in 9 years. The call premium is one year of coupon payments. Compute the bond's current yield. Assume interest payments are paid semi-annually and a par value of $5,000.

5.94%

A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

53.48

A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

6.00

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket?

6.00

A 7.25 percent coupon bond with 25 years left to maturity can be called in 5 years. The call premium is one year of coupon payments. It is offered for sale at $1066.24. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

6.90%

A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in 4 years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

7.13

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?

7.38

A 10% coupon bond has 15 years to maturity and could be called in 2 years. If the bond is called, investors will earn 4%. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond's yield to maturity?

7.65%

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

8 years, 6 months

A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

8.03

An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 102.0. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

8.62%; yes, the bond will be called

What's the current yield of an 8.15 percent coupon corporate bond quoted at a price of 94.30?

8.64

Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

877.81, $1024.20, $5072.50, respectively

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.25%, on 20-year Treasury bonds is 7.95%, and on a 20-year corporate bond is 10.75%. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, calculate the current rate on a 10-year corporate bond.

9.05

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.45% and on 10-year Treasury bonds is 7.75%. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(5r5).

9.07

Suppose we observe the following rates: 1R1 = 13%, 1R2 = 16%, and E(2r1) = 10%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

9.1

An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

9.36%; no, the bond will not be called

A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

9.54%

A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

998 years

The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

A 5-year corporate bond must have a higher yield than a 30-year Treasury bond.

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

junk bonds

Which of following are backed only by the reputation and financial stability of the corporation?

A. Debentures B. Unsecured bonds C. Both a and b IS THE ANSWER

this is the ease with which an asset can be converted into cash

liquidity

Which of the following statements is correct?

All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

All of these are factors that determine the coupon rate of a company's bonds.

Possible shapes for the yield include all of the following except ____________.

All of these are possible shapes.

Which of the following statements is correct?

An IPO is an example of a primary market transaction.

which of the following statements is correct?

Bonds with short-term maturities will have very little interest rate risk.

If a bond is selling at par value, which of the following statements is correct?

Both of these statements are correct.

Junk bonds are those bonds with a credit rating of _____________.

BB and lower

Which of these statements is false?

Bonds are always less risky than stocks.

All of the following special provisions benefit security holders except ____________.

Callability

Which of the following is a true statement?

If interest rates fall, all bonds will enjoy rising values.

Assume that you observe the following rates on long-term bonds:U.S. Treasury bonds = 4.15%AAA Corporate bonds = 6.2%BBB Corporate bonds = 7.15%The main reason for the differences in the interest rates is:

Default risk premium

Which of the following was the catalyst for the recent financial crisis?

Defaults on subprime mortgages.

Which of the following is not correct with respect to financial institutions?

Financial institutions channel funds from those with shortages to those with surplus funds.

Investment grade bonds include those bonds with ratings _____________.

From AAA to BBB

. All of the following are secondary market transactions except ___________.

GE sells $30 million of new preferred stock

Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

IB bond, B&O bond, TC bond, JM bond

Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55%, IBM bond with yield of 10.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield of 9.46%.

IBM, Banc Ono, Trump Casino, Treasury

Which of the following statements is correct?

If the unbiased expectations theory is correct, the maturity risk premium is zero.

Which of the following is not true about EE savings bonds?

Interest payments are received annually but are tax deductible.

Under what conditions is a bond likely to be called?

Interest rates have significantly declined.

Which of the following statements is correct?

Long-term bonds have more interest rate risk than short-term bonds.

To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued ______________.

Mortgage-backed securities

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75%. Bond B is a corporate bond that yields 7.75%. If Sally is in the 28% tax bracket, which bond should she select and why?

Sally should select Bond A because its TEY is greater than the yield of Bond B.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate bond that yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select and why?

Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.15%. Bond B is a corporate bond that yields 7.15%. If Sally is in the 28% tax bracket, which bond should she select and why?

Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.

Possible shapes for the yield curve include all of the following except ___________.

Vertical line

Under which conditions will an investor demand a larger return (yield) on a bond?

The bond issue is downgraded from A to BBB.

All of the following items would need to be included in the bond's indenture agreement except _____.

The credit rating

If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?

The current bond price will increase and interest rates on new bonds issues will decrease.

If a bond is selling at a discount, which of the following statements is correct?

The current yield must be greater than the coupon rate.

All of the following are factors that influence interest rates for individual securities except ________.

The home mortgage rate

Which of the following statements is correct?

The rate on a 10-year Corporate can never be less than the rate on a 10-year Treasury.

The real interest rate is _______________________.

The rate that a security would pay if no inflation were expected over its holding period

If the yield curve is downward sloping, what is the yield to maturity on a 30-year Treasury bond relative to a 10-year Treasury bond?

The yield on the 10-year bond must be greater than the yield on the 30-year bond.

Which of the following statements is correct?

There is an inverse relationship between bond prices and bond yields.

Which of the following is an important advantage to the issuer of a bond with a call provision?

They allow for refinancing opportunities.

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

They are tax exempt—at least at the federal level.

Which of the following would NOT be an example of an agency bond?

Treasury bills`

`Rank from lowest credit risk to highest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55%, IBM bond with yield of 7.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield of 6.12%.

Treasury, Banc Ono, IBM, Trump Casino

Which of the following issues Treasury Inflation Protected Securities (TIPS)?

U.S. Treasury

A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in 9 years. The call premium is one year of coupon payments. Compute the bond's yield to maturity and yield to call. Assume interest payments are paid semi-annually and a par value of $5,000.

YTM = 6.24%; YTC = 7.08%

On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:1R1 = 4.55%, 1R2 = 4.75%, 1R3 = 5.25%, 1R4 = 5.95%Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of May 23, 20XX.

Year 1: 4.95%; Year 2: 6.26%; Year 3: 8.08%

Which of the following statements is correct?

Yield spreads between bonds of different quality change over time.

Which of these statements answers why bonds are known as fixed income securities?

all

Bonds are issued by which of the following? A. corporations B. federal government or its agencies C. state and local governments D. all of these

all of these

Which of the following are main issuers of bonds?

all of these

Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?

asset-backed securities

To compensate the bondholders for getting the bond called, the issuer pays which of the following?

call premium

This determines the dollar amount of interest paid to bondholders.

coupon rate

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

credit quality risk

This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.

default risk

this is a security formalizing an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future.

derivative security

Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

discount

Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

discount

All of the following are common shapes for the yield curve except ____________.

eliptical

these money market instruments are short-term funds transferred between financial institutions, usually for no more than one day

federal funds

All of the following are types of financial institutions except _______.

federal reserve bank

All of the following are factors that affect nominal interest rates except ___________.

foreign exchange

A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semi-annually and a par value of $1,000.)

increase $23.72

Bond prices are quoted in terms of which of the following?

percent of par value

Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

reinvestment rate risk

which of the following is not a capital market instrument?

u.s treasury bills

According to this theory of term structure of interest rates, at any given point in time, the yield curve reflects the market's current expectations of future short-term rates.

unbiased expectations theory

once firms issue financial instruments in primary markets, these same stocks and bonds are traded in

secondary markets

these feature debt securities/ instruments with maturities of one year or less

-money markets

these capital market instruments are long-term loans to individuals/businesses to purchase homes, pieces of land, or other real property

-mortgages

this is the risk that an asset's sale price will be lower than its purchase price

-price risk

which of these statements is true?

-the higher the default risk, the higher the interest rate that security buyers will demand

The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.00%, and the 6-year Treasury rate is 6.20%. From discussions with your broker, you have determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and 2.50% in Year 3 and beyond. Further, you expect that real interest rates will be 4.4% annually for the foreseeable future. Calculate the maturity risk premium on the 3-year Treasury security.

0.10

A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on 2-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?

0.2

A 2-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the 2-year Treasury security?

0.25

The Wall Street Journal reports that the rate on 3-year Treasury securities is 4.75 percent and the rate on 4-year Treasury securities is 5.00 percent. The one-year interest rate expected in three years is E(4r1), 5.25 percent. According to the liquidity premium hypotheses, what is the liquidity premium on the 4-year Treasury security, L4?

0.504

You are considering an investment in 30-year bonds issued by a corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.50 percent. Your broker has determined the following information about economic activity and the corporation bonds:Real interest rate = 2.50%Default risk premium = 1.75%Liquidity risk premium = 0.70%Maturity risk premium = 1.50%What is the inflation premium? What is the fair interest rate on the corporation's 30-year bonds?

1% and 7.45%

The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.00 percent, and the 6-year Treasury rate is 7.25 percent. From discussions with your broker, you have determined that expected inflation premium is 1.75 percent next year, 2.25 percent in Year 2, and 2.40 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.75 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?

1.10

A 2-year Treasury security currently earns 5.13%. Over the next 2 years, the real interest rate is expected to be 2.15% per year and the inflation premium is expected to be 1.75% per year. Calculate the maturity risk premium on the 2-year Treasury security.

1.23

In 20XX, the 10-year Treasury rate was 4.5% while the average 10-year Aaa corporate bond debt carried an interest rate of 6.0%. What is the average default risk premium on Aaa corporate bonds?

1.5%

A corporation's 10-year bonds have an equilibrium rate of return of 7 percent. For all securities, the inflation risk premium is 1.50 percent and the real interest rate is 3.0 percent. The security's liquidity risk premium is 0.15 percent and maturity risk premium is 0.70 percent. The security has no special covenants. What is the bond's default risk

1.65

Suppose we observe the following rates: 1R1 = 8%, 1R2 = 10%, and E(2r1) = 8%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?

4.04

Suppose we observe the three-year Treasury security rate (1R3) to be 6 percent, the expected one-year rate next year E(2r1) to be 3 percent, and the expected one-year rate the following year E(3r1) to be 5 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, 1R1?

10.13

A particular security's default risk premium is 3%. For all securities, the inflation risk premium is 1.75% and the real interest rate is 4.2%. The security's liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the security's equilibrium rate of return.

10.25

The Wall Street Journal reports that the rate on 4-year Treasury securities is 4.75 percent and the rate on 5-year Treasury securities is 5.95 percent. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be four years from today, E(5r1)?

10.89

Assume the current interest rate on a one-year Treasury bond (1R1) is 5.50%, the current rate on a two-year Treasury bond (1R2) is 5.95%, and the current rate on a three-year Treasury bond (1R3) is 8.50%. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, 3f1?

13.79

The Wall Street Journal reports that the rate on 4-year Treasury securities is 7.50% and the rate on 5-year Treasury securities is 9.15%. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be four years from today, E(5r1)?

16.0

Suppose we observe the following rates: 1R1 = 12%, 1R2 = 15%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(2r1)?

18.0

Dakota Corporation 15-year bonds have an equilibrium rate of return of 9%. For all securities, the inflation risk premium is 1.95% and the real interest rate is 3.65%. The security's liquidity risk premium is 0.35% and maturity risk premium is 0.95%. The security has no special covenants. Calculate the bond's default risk premium.

2.10

Suppose we observe the three-year Treasury security rate (1R3) to be 11%, the expected one-year rate next year E(2r1) to be 4%, and the expected one-year rate the following year E(3r1) to be 5%. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate, 1R1?

25.24

The Wall Street Journal reports that the rate on 3-year Treasury securities is 6.50%, and the 6-year Treasury rate is 6.80%. From discussions with your broker, you have determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and 2.60% in Year 3 and beyond. Further, you expect that real interest rates will be 3.4% annually for the foreseeable future. Calculate the maturity risk premium on the 3-year and the 6-year Treasury security.

3-year: 0.5%; 6-year: 0.80%

Nikki G's Corporation's 10-year bonds are currently yielding a return of 9.25%. The expected inflation premium is 2.0% annually and the real interest rate is expected to be 3.10% annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is 0.1%. The maturity risk premium is 0.10% on 2-year securities and increases by 0.05% for each additional year to maturity. Calculate the default risk premium on Nikki G's 10-year bonds.

3.55

One-year Treasury bills currently earn 3.75 percent. You expect that one year from now, one-year Treasury bill rates will increase to 4.15 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

3.95

A recent edition of The Wall Street Journal reported interest rates of 3.10 percent, 3.50 percent, 3.75 percent, and 3.95 percent for three-year, four-year, five-year, and six-year Treasury security yields, respectively, According to the unbiased expectation theory of the term structure of interest rates, what are the expected one-year rates for year 6?

4.96

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:1R1 = 5%, E(2r1) = 6%, E(3r1) = 7.5% E(4r1) = 6.85%Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities.

5.00%, 5.50, 6.16, 6.33

One-year Treasury bills currently earn 4.5 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

5.59

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities?

5.625

One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. The liquidity premium on two-year securities is 0.075 percent. If the liquidity theory is correct, what should the current rate be on two-year Treasury securities?

5.662

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury securities?

6.00

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:R1 = 5.95%E(r2) = 6.25% L2 = 0.05%E(r3) = 6.75% L3 = 0.10%E(r4) = 7.15% L4 = 0.12%Using the liquidity premium hypothesis, what should be the current rate on four-year Treasury securities?

6.59

The Wall Street Journal reports that the rate on 3-year Treasury securities is 6.25 percent and the rate on 5-year Treasury securities is 6.45 percent. According to the unbiased expectations hypotheses, what does the market expect the 2-year Treasury rate to be three years from today, E(4r2)?

6.75

you are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 3.55%. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real interest rate = 2.75%Default risk premium = 1.05%Liquidity risk premium = 0.50%Maturity risk premium = 1.85%What is the fair interest rate on Moore Corporation 30-year bonds?

6.95

The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 6.50 percent and on 10-year Treasury bonds is 6.75 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchased five years from today, E(5r1).

7.00

On May 23, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows: Using the unbiased expectations theory, what is the one-year forward rate on zero-coupon Treasury bonds for year four as of May 23, 20XX?

7.05

Assume the current interest rate on a one-year Treasury bond (1R1) is 5.00 percent, the current rate on a two-year Treasury bond (1R2) is 5.75 percent, and the current rate on a three-year Treasury bond (1R3) is 6.25 percent. If the unbiased expectations theory of the term structure of interest rates is correct, what is the one-year interest rate expected on Treasury bills during year 3, 3f1?

7.26

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, 2f1?

7.51

Based on economists' forecasts and analysis, one-year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows: Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security?

7.736

The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.

8.00

The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.25% and the rate on 4-year Treasury securities is 8.50%. The one-year interest rate expected in three years is E(4r1), 4.10%. According to the liquidity premium hypotheses, what is the liquidity premium on the 4-year Treasury security, L4?

8.2

A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity risk premium is 0.90 percent.The security has no special covenants. What is the security's equilibrium rate of return?

8.90

The theory that argues that individual investors and financial institutions have specific maturity preferences is called the ______________.

Market segmentation theory

These provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds

Primary markets

Which of the following statements is correct?

The market segmentation theory assumes that borrowers and investors do not want to shift from one maturity sector to another without an interest rate premium.

One-year interest rates are 3%. The market expects one-year rates to be 5% one year from now. The market also expects one-year rates to be 7% two years from now. Assume that the unbiased expectations theory holds. Which of the following is correct?

The yield curve is upward sloping.

The theory that states that the yield curve reflects the market's current expectations of future short-term rates is called the _____________.

Unbiased expectations theory

these market trade currencies for immediate or for some future stated delivery

foreign exchange markets

This is the expected or "implied" rate on a short-term security that will originate at some point in the future.

forward rate

All of the following are benefits that financial institutions provide to our economy except _________.

increased price risk

This theory argues that individual investors and financial institutions have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred requires a higher interest rate.

market segmentation theory

the interest rate that is actually observed in financial markets

nominal interest rates

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4 respectively) are as follows:1R1 = 5%, E(2r1) = 6%, E(3r1) = 7.5% E(4r1) = 7.85%Using the unbiased expectations theory, calculate the current (long-term) rates for three-year- and four-year-maturity Treasury securities.

one-year: 6.16, two-year: 6.58

Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following 3 years (i.e., years 2, 3 and 4, respectively) are as follows:1R1 = 5%, E(2r1) = 7%, E(3r1) = 7.5% E(4r1) = 7.85%Using the unbiased expectations theory, calculate the current (long-term) rates for one-year and two-year -maturity Treasury securities.

one-year; 5.00% two year; 6.00%

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

par or face value

This is the interest rate that would exist on a default-free security if no inflation were expected.

real interest rate

Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from those with surplus funds to those with shortages of funds?

secondary markets

Which of these is NOT a theory that explains the shape of the term structure of interest rates?

short-term structure of interest rates theory

This is a comparison of market yields on securities, assuming all characteristics except maturity are the same.

term structure of interest rates