Question 1.1. Kop Corporation’s 5-year bonds yield 6.50%, and T-bonds with the samematurity yield 4.70%. The default risk premium for Kop’s bonds is DRP = 0.40%, theliquidity premium on Kop’s bonds is LP = 1.40% versus zero on T-bonds, the inflationpremium (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*? (Points : 0.07)2.35%3.16%2.72%2.91%2.80% Question 2.2. Which of the following statements is CORRECT? (Points : 0.07)If the maturity risk premium (MRP) is greater than zero, the Treasury bond yieldcurve must be upward sloping.If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve mustbe flat.If inflation is expected to increase in the future and the maturity risk premium(MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.If the expectations theory holds, the Treasury bond yield curve will never bedownward sloping.Because long-term bonds are riskier than short-term bonds, yields on long-termTreasury bonds will always be higher than yields on short-term T-bonds. Question 3.3. The real risk-free rate is 3.05%, inflation is expected to be 2.60% this year,and the maturity risk premium is zero. Ignoring any cross-product terms, what is theequilibrium rate of return on a 1-year Treasury bond? (Points : 0.07)7.06%5.65%5.25%5.37%6.44% Question 4.4. Kebt Corporation’s Class Semi bonds have a 12-year maturity and an 9.75%coupon paid semiannually (4.875% each 6 months), and those bonds sell at their $1,000par value. The firm’s Class Ann bonds have the same risk, maturity, nominal interest rate,and par value, but these bonds pay interest annually. Neither bond is callable. At whatprice should the annual payment bond sell? (Points : 0.07)$993.64$983.80$1,042.82$747.69$1,003.47 Question 5.5. Morin Company’s bonds mature in 8 years, have a par value of $1,000, andmake an annual coupon interest payment of $65. The market requires an interest rate of7.7% on these bonds. What is the bond’s price? (Points : 0.07)$930.25$883.74$939.55$855.83$762.80 Question 6.6. Radoski Corporation’s bonds make an annual coupon payment of 7.35%every year. The bonds have a par value of $1,000, a current price of $970, and mature in12 years. What is the yield to maturity on these bonds? (Points : 0.07)7.82%7.51%5.88%9.45%7.74% Question 7.7. Sadik Inc.’s bonds currently sell for $1,270 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5years at $1,100. What is their yield to call (YTC)? (Points : 0.07)6.89%5.89%5.18%6.54%6.30% Question 8.8. Malko Enterprisesâ bonds currently sell for $990. They have a 6-yearmaturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?(Points : 0.07)7.35%6.44%9.47%8.11%7.58% Question 9.9. Which of the following statements is CORRECT? (Points : 0.07)Two bonds have the same maturity and the same coupon rate. However, one iscallable and the other is not. The difference in prices between the bonds will be greater ifthe current market interest rate is below the coupon rate than if it is above the coupon rate.A callable 10-year, 10% bond should sell at a higher price than an otherwise similarnoncallable bond.Corporate treasurers dislike issuing callable bonds because these bonds mayrequire the company to raise additional funds earlier than would be true if noncallable bondswith the same maturity were used.Two bonds have the same maturity and the same coupon rate. However, one iscallable and the other is not. The difference in prices between the bonds will be greater ifthe current market interest rate is above the coupon rate than if it is below the coupon rate. The actual life of a callable bond will always be equal to or less than the actual lifeof a noncallable bond with the same maturity. Therefore, if the yield curve is upwardsloping, the required rate of return will be lower on the callable bond. Question 10.10. Which of the following statements is CORRECT? (Points : 0.07)Senior debt is debt that has been more recently issued, and in bankruptcy it is paidoff after junior debt because the junior debt was issued first.A company’s subordinated debt has less default risk than its senior debt.Convertible bonds generally have lower coupon rates than non-convertible bonds ofsimilar default risk because they offer the possibility of capital gains.Junk bonds typically provide a lower yield to maturity than investment-grade bonds.A debenture is a secured bond that is backed by some or all of the firm Question 11.11. Which of the following statements is CORRECT? (Points : 0.07)The total return on a bond during a given year is based only on the coupon interestpayments received.All else equal, a bond that has a coupon rate of 10% will sell at a discount if therequired return for bonds of similar risk is 8%.The price of a discount bond will increase over time, assuming that the bondâs yieldto maturity remains constant.For a given firm, its debentures are likely to have a lower yield to maturity than itsmortgage bonds.When large firms are in financial distress, they are almost always liquidated,whereas smaller firms are generally reorganized. Question 12.12. As a general rule, a company’s debentures have higher required interestrates than its mortgage bonds because mortgage bonds are backed by specific assets whiledebentures are unsecured. (Points : 0.07)TrueFalse Question 13.13. Junk bonds are high-risk, high-yield debt instruments. They are often usedto finance leveraged buyouts and mergers, and to provide financing to companies ofquestionable financial strength. (Points : 0.08)TrueFalse Question 14.14. There is an inverse relationship between bonds’ quality ratings and theirrequired rates of return. Thus, the required return is lowest for AAA-rated bonds, andrequired returns increase as the ratings get lower. (Points : 0.08)TrueFalse
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