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

The rampd division of pele corp has just developed a

The R&D division of Pele Corp. has just developed a chemical for sterilizing the vicious Brazilian "killer bees" which are invading Mexico and the southern United States. The president of Pele is anxious to get the chemi ...

What effect on a countrys current account balance is an

What effect on a country's current account balance is an increase in the use of quotas expected to have? Will it increase, decrease or remain the same? Please provide an explanation for your answer. Would your answer cha ...

The 5 year corporate bond yields 7 per year and the 5 year

The 5 year corporate bond yields 7% per year and the 5 year Treasury bond yields 5%. If the liquidity premium on the corporate bond is 0.3%, find the default risk premium on the corporate bond.

A proposed new investment has projected sales of 836000

A proposed new investment has projected sales of $836,000. Variable costs are 56 percent of sales, and fixed costs are $187,540; depreciation is $96,500. Assume a tax rate of 40 percent. What is the projected net income? ...

Tyler industries stock traditionally provides a rate of

Tyler Industries stock traditionally provides a rate of return of 14.2 percent. The company just paid an annual dividend of $1.65 a share and recently announced it will commence increasing its dividends by 3.5 percent ea ...

1 list in order the major sections that all research papers

1. List in order the major sections that all research papers must have. 2. What is the purpose of the introduction of a paper? 3. When presenting the results of statistical analyses, what information should be presented? ...

A five-year project has an initial fixed asset investment

A five-year project has an initial fixed asset investment of $320,000, an initial NWC investment of $32,000, and an annual OCF of −$31,000. The fixed asset is fully depreciated over the life of the project and has no sal ...

1 a conversion feature allowsa the bondholder to redeem the

1. A conversion feature allows: A. the bondholder to redeem the bond before the maturity date. B. the corporation to redeem the bond before the maturity date. C. the bondholder to convert the bond to common stock. D. the ...

Syntex is considering an investment in one of two stocks

Syntex is considering an investment in one of two stocks. Given the information that follows, which investment is better, based on the risk (the standard deviation) and return? COMMON STOCK A                             ...

A stock has an expected return of 159 percent the risk-free

A stock has an expected return of 15.9 percent, the risk-free rate is 6.35 percent, and the market risk premium is 7.4 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your ...

  • 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

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

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