1. If inflation is expected to be relatively low, theninterest rates will tend to be relatively low, other things heldconstant.
A. True B. False
2. Ms Parker found two opportunities of investment A (rate ofreturn 3%, standard deviation 6%) and investment B (rate of return8%, standard deviation 4%). Investment B is better than InvestmentA (hints: calculate each CV and then compare each other).
A. True B. False
3. The larger the standard deviation is, the lower theprobability that actual returns will be close to expectedreturns.
A. True B. False
4. If inflation is expected to increase in the future and thematurity risk premium (MRP) is greater than zero, the Treasury bondyield curve must be upward sloping.
A. True B. False
5. A 15-year bond with a face value of $1,000 currently sellsfor $1,200. So, the bond's yield to maturity or discount rate isless than its coupon rate.
A. True B. False
6. Moore Corporation has 6-year bonds. Inflation premium (IP)on a 6year bond is 1.00%. The real risk-free rate is r* = 2.80%,the default risk premium for Moore's bonds is DRP = 0.85% versuszero for T-bonds, the liquidity premium on Moore's bonds is LP =1.20%, and the maturity risk premium for all bonds is found withthe formula MRP = (t – 1) x 0.1%, where t = number of years tomaturity. What is the yield on Moore Corporation’s 6-yearbonds?
7. Davis Inc.'s bonds currently sell for $800 and have a parvalue of $1,000. They pay a $100 annual coupon and have a 20-yearmaturity, but they can be called in 5 years at $1,200. What istheir Capital Gain Yield (CGY)?
8. A 10-year, 5% semiannual coupon bond selling for $1,135.90can be called in 4 years for $1,200 (hint: par value is $1,000).What is its yield to maturity (YTM)?
9. A 10-year, 5% semiannual coupon bond selling for $1,135.90can be called in 4 years for $1,200 (hint: par value is $1,000).What s its current yield (CY)?
10. A 10-year, 10% semiannual coupon bond selling for$1,135.90 can be called in 4 years for $1,200 (hint: par value is$1,000). What is its yield to call (YTC)?
11. Davis Inc.'s bonds currently sell for $800 and have a parvalue of $1,000. They pay a $100 annual coupon and have a 20-yearmaturity, but they can be called in 5 years at $1,200. What istheir yield to maturity (YTM)?
12. Davis Inc.'s bonds currently sell for $800 and have a parvalue of $1,000. They pay a $60 annual coupon and have a 20-yearmaturity, but they can be called in 5 years at $1,200. What istheir Expected Current Yield (CY)?
13. Davis Inc.'s bonds currently sell for $800 and have a parvalue of $1,000. They pay a $60 annual coupon and have a 20-yearmaturity, but they can be called in 5 years at $1,200. What istheir yield to Call (YTC)?
14. Kimberly’ Motors has a beta of 1.40, the T-bill rate is3.00%, and the Tbond rate is 7.0%. The annual return on the stockmarket during the past 3 years was 15.00%, but investors expect theannual future stock market return to be 10.00%. Based on the SML,what is the firm's required return?
15. Suppose the interest rate (return rate) on a 1-year T-bondis 3.0% and that on a 2-year T-bond is 6.0%. Assuming the pureexpectations theory is correct, what is the market's forecast for1-year rates 1 year from now?
16. Stacker’s Corporation's bonds have a 10-year maturity, a10.00% semiannual coupon, and a par value of $1,000. The goinginterest rate (rd) is 2.00%, based on semiannual compounding. Whatis the bond’s price?
17. If the pure expectations theory holds, what does themarket expect will be the interest rate (expected return rate) onone-year securities, three years from now? (1year maturity yield is6.0%; 2year maturity yield is 6.1%; 3year maturity yield is 6.3%;4year maturity yield is 6.3 %; 5year maturity yield is 6.3%)?(Hints: Draw the timeline and then calculate the interest rate(expected return rate) on two-year securities, two years fromnow.)
