Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Management Expert

problem 1: 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
 
problem 2: Assume that 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%.  What is the default risk premium on corporate bonds?

a) 1.08%
b) 1.45%
c) 1.32%
d) 1.20%
e) 1.60%
 
problem 3: Keys Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the
maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity.  What is the default risk premium (DRP) on Keys' bonds?

a) 1.17%
b) 1.73%
c) 1.43%
d) 1.57%
e) 1.30% 
 
problem 4: If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

a) The yield on a 10-year bond would have to be higher than that on a 1 year bill because of the maturity risk premium.
b) It is impossible to tell without knowing the coupon rates of the bonds.
c) The yields on the two securities would be equal.
d) The yield on a 10-year bond would be less than that on a 1-year bill.
e) It is impossible to tell without knowing the relative risks of the two securities.
 
problem 5: Assume that the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.02% per year to maturity applies, i.e., MRP = 0.20%(t), where t is the years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% applies to A-rated corporate bonds. What is the difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond?  Here we assume that the pure expectations theory is NOT valid, and disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.

a) 0.77%
b) 0.81%
c) 0.94%
d) 0.89%
e) 0.85%
 
problem 6: One of the four most fundamental factors that affect the cost of money as discussed in the text is the time preference for consumption. The higher the time preference, the lower the cost of money, other things held constant.

a) True
b) False
 
problem 7: In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t − 1)%, where t is the number of years until the bond matures.

Given this information, which of the following statements is CORRECT?

a) The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
b) The yield curve must be upward sloping.
c) The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
d) The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
e) The yield curve must be "humped."
 
problem 8: Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.90%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP = 0.40%, the liquidity premium on Kelly's bonds is LP = 2.2% versus zero on T-bonds, and the inflation premium (IP) is 1.5%.  What is the maturity risk premium (MRP) on all 5-year bonds?

a) 0.90%
b) 0.81%
c) 0.93%
d) 0.99%
e) 1.09%
 
problem 9: Kop Corporation's 5-year bonds yield 6.50%, and T-bonds with the same maturity yield 4.40%. The default risk premium for Kop's bonds is DRP = 0.40%, the liquidity premium on Kop's bonds is LP = 1.70% versus zero on T-bonds, the inflation premium (IP) is 1.50%, and the maturity risk premium (MRP) on 5-year bonds is 0.40%. What is the real risk-free rate, r*?

a) 2.04%
b) 2.50%
c) 2.26%
d) 2.38%
e) 2.14%
 
problem 10: Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% 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 Kay's bonds?

a) 0.36%
b) 0.41%
c) 0.50%
d) 0.40%
e) 0.55%

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91998

Have any Question? 


Related Questions in Financial Management

Repeat problem for a large open economyproblem -in a small

Repeat Problem for a large open economy. Problem :- In a small open economy, how would each of the following events affect the equilibrium interest rate? a. A natural disaster causes extensive damage to homes, bridges, a ...

Learning objective analyze the impact of business

Learning Objective : Analyze the impact of business transactions on accounts. The following selected events were experienced by either Landscapes Deluxe, Inc., a corporation, or Bill Tinsley, the major stockholder. State ...

Why would credit rating agencies indicate that they might

Why would credit rating agencies indicate that they might reduce the AAA rating on U.S. Treasury bonds if the federal government runs high deficits over a period of years? What effect would a lower rating have on Treasur ...

An investor is considering the purchase of 10-year us

An investor is considering the purchase of 10-year U.S. Treasury bonds and plans to hold them to maturity. Federal taxes on coupons must be paid during the year they are received, and tax must also be paid on the capital ...

The manchester corporation has warrants presently

The Manchester Corporation has warrants presently outstanding, and each warrant entitles the holder to purchase one share of the company's common stock at an exercise price of $20 a share. If the market price of the warr ...

What is the macaulay duration of a 56 percent coupon bond

What is the Macaulay duration of a 5.6 percent coupon bond with ten years to maturity and a current price of $1,057.70? What is the modified duration? (Do not round intermediate calculations. Round your answers to 3 deci ...

An investor can design a risky portfolio based on two

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 31%. Stock B has an expected return of 13% and a standard deviation of re ...

Even though most corporate bonds in the united states make

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 10 yea ...

You manage an equity fund with an expected risk premium of

You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in ...

Financial ratio analysis is often divided into five areas

Financial ratio analysis is often divided into five areas: liquidity, activity, debt, profitability, and market ratios. Differentiate each of these areas of analysis from the others and give and define examples of each. ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen