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accounting

Questions and Answers of Accounting

What would be the likely effect on the yield to maturity of a bond resulting from?a. An increase in the issuing firm’s times-interest-earned ratio.b. An increase in the issuing firm’s
A large corporation issued both fixed and floating-rate notes 5 years ago, with terms given in the following table:a. Why is the price range greater for the 9% coupon bond than the floating-rate
Masters Corp. issues two bonds with 20-year maturities. Both bonds are callable at $1,050. The first bond is issued at a deep discount with a coupon rate of 4% and a price of $580 to yield 8.4%. The
A newly issued bond pays its coupons once annually. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.a. Find the holding-period return for a 1-year investment period
Leaf Products may issue a 10-year maturity fixed-income security, which might include a sinking fund provision and either refunding or call protection.a. Describe a sinking fund provision.b. Explain
Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in 5 years, and have a 7% annual coupon rate paid semiannually.a. Calculate the:i. Current yield.ii. Yield to maturity (to
On May 30, 2008, Janice Kerr is considering one of the newly issued 10-year AAA corporate bonds shown in the following exhibit.a. Suppose that market interest rates decline by 100 basis points (i.e.,
A convertible bond has the following features:Coupon ................. 5.25%Maturity .................. June 15, 2027Market price of bond ............. $77.50Market price of underlying common stock
a. Explain the impact on the offering yield of adding a call feature to a proposed bond issue.b. Explain the impact on the bonds expected life of adding a call feature to a proposed bond issue.c.
a. An investment in a coupon bond will provide the investor with a return equal to the bond’s yield to maturity at the time of purchase if:i. The bond is not called for redemption at a price that
What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations and liquidity preference theories of the term
Under the expectations hypothesis, if the yield curve is upward sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
Under the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. True/false/uncertain? Why?
If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant?a. Upward sloping.b. Downward sloping.c.
Which of the following is true according to the pure expectations theory? Forward rates:a. Exclusively represent expected future short rates.b. Are biased estimates of market expectations?c. Always
Assuming the pure expectations theory is correct, an upward-sloping yield curve implies:a. Interest rates are expected to increase in the future.b. Longer-term bonds are riskier than short-term
The following is a list of prices for zero-coupon bonds of various maturities. Calculate the yields to maturity of each bond and the implied sequence of forward rates.Maturity (Years) Price of Bond1
Assuming that the expectations hypothesis is valid, compute the expected price path of the 4-year bond in the previous problem as time passes. What is the rate of return of the bond in each year?
Consider the following $1,000 par value zero-coupon bonds:According to the expectations hypothesis, what is the expected 1-year interest rate 3 years fromnow?
The term structure for zero-coupon bonds is currently:Maturity (Years) YTM (%)1 .............4% 2 .............5
The yield to maturity on 1-year zero-coupon bonds is currently 7%; the YTM on 2-year zeros is 8%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon
Below is a list of prices for zero-coupon bonds of various maturities.Maturity (Years) Price of $1,000 Par Bond
Prices of zero-coupon bonds reveal the following pattern of forward rates:Year Forward Rate1 ............5%2 ............73 ............8In addition to the zero-coupon bond, investors also may
You observe the following term structure: Effective Annual YTM 1-year zero-coupon bond
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 12% (paid annually) is
Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $94.34, while a 2-year zero sells at $84.99. You are considering the purchase of a 2-year-maturity bond making annual
The current yield curve for default-free zero-coupon bonds is as follows:Maturity (Years) YTM (%)1 ............10%2 ............113 ............12a. What are the implied 1-year forward rates?b.
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.Maturity (Years) Price1 ............. $925.932
Continue to use the data in the preceding problem. Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years.a. Suppose that you buy today one 3-year maturity
Briefly explain why bonds of different maturities have different yields in terms of the expectations and liquidity preference hypotheses. Briefly describe the implications of each hypothesis when the
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed
The following table shows yields to maturity of zero-coupon Treasury securities.Term to Maturity (Years) Yield to Maturity (%)1 ..................3.50%2 ..................4.503
The 6-month Treasury bill spot rate is 4%, and the 1-year Treasury bill spot rate is 5%. What is the implied 6-month forward rate for 6 months from now?
The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither
Sandra Kapple is a fixed-income portfolio manager who works with large institutional clients. Kapple is meeting with Maria VanHusen, consultant to the Star Hospital Pension Plan, to discuss
A portfolio manager at Superior Trust Company is structuring a fixed-income portfolio to meet the objectives of a client. The portfolio manager compares coupon U.S. Treasuries with zero coupon
The shape of the U.S. Treasury yield curve appears to reflect two expected Federal Reserve reductions in the federal funds rate. The current short-term interest rate is 5%. The first reduction of
U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury notes.a. Using the data in the table below, calculate the 5-year
The spot rates of interest for five U.S. Treasury Securities are shown in the following exhibit. Assume all securities pay interest annually.Spot Rates of InterestTerm to Maturity
Prices of long-term bonds are more volatile than prices of short-term bonds. However, yields to maturity of short-term bonds fluctuate more than yields of long-term bonds. How do you reconcile these
How can a perpetuity, which has an infinite maturity, have a duration as short as 10 or 20 years?
A 9-year bond has a yield of 10% and a duration of 7.194 years. If the market yield changes by 50 basis points, what is the percentage change in the bond’s price?
Find the duration of a 6% coupon bond making annual coupon payments if it has 3 years until maturity and has a yield to maturity of 6%. What is the duration if the yield to maturity is 10%?
Find the duration of the bond in Problem 4 if the coupons are paid semiannually.
The historical yield spread between AAA bonds and Treasury bonds widened dramatically in 2008. If you believe the spread will soon return to more typical historical levels, what should you do? This
You predict that interest rates are about to fall. Which bond will give you the highest capital gain?a. Low coupon, long maturity.b. High coupon, short maturity.c. High coupon, long maturity.d. Zero
Rank the durations or effective durations of the following pairs of bonds:a. Bond A is an 8% coupon bond, with a 20-year time to maturity selling at par value. Bond B is an 8% coupon bond, with a
An insurance company must make payments to a customer of $10 million in 1 year and $4 million in 5 years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation to
Long-term Treasury bonds currently are selling at yields to maturity of nearly 8%. You expect interest rates to fall. The rest of the market thinks that they will remain unchanged over the coming
Currently, the term structure is as follows: 1-year bonds yield 7%, 2-year bonds yield 8%, 3-year bonds and longer-maturity bonds all yield 9%. An investor is choosing between 1-, 2-, and 3-year
You will be paying $10,000 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 8%.a. What is the present value and duration of your obligation?b. What maturity
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity, each currently yielding
My pension plan will pay me $10,000 once a year for a 10-year period. The first payment will come in exactly 5 years. The pension fund wants to immunize its position.a. What is the duration of its
A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has duration of 11.54 years and convexity of 192.4. The bond currently sells at a yield to maturity of 8%. Use a
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income
Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the fixed-rate note in the table. Specifically, he assumes an increase
A 30-year maturity bond has a 7% coupon rate, paid annually. It sells today for $867.42. A 20-year maturity bond has 6.5% coupon rate, also paid annually. It sells today for $879.50. A bond market
a. Use a spreadsheet to calculate the durations of the two bonds in Spreadsheet 1 if the annual interest rate increases to 12%. Why does the duration of the coupon bond fall while that of the zero
a. Footnote 6 presents the formula for the convexity of a bond. Build a spreadsheet to calculate the convexity of a 5-year, 8% coupon bond making annual payments at the initial yield to maturity of
A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value.a. What are the convexity and the duration of the
a. Explain the impact on the offering yield of adding a call feature to a proposed bond issue.b. Explain the impact on both effective bond duration and convexity of adding a call feature to a
a. A 6% coupon bond paying interest annually has a modified duration of 10 years, sells for $800, and is priced at a yield to maturity of 8%. If the YTM increases to 9%, what is the predicted change
A newly issued bond has the following characteristics:a. Calculate modified duration using the information above.b. Explain why modified duration is a better measure than maturity when calculating
Bonds of Zello Corporation with a par value of $1,000 sell for $960, mature in 5 years, and have a 7% annual coupon rate paid semiannually.a. Calculate each of the following yields:i. Current
Sandra Kapple presents Maria VanHusen with a description, given in the following table, of the bond portfolio held by the Star Hospital Pension Plan. All securities in the bond portfolio are
One common goal among fixed-income portfolio managers is to earn high incremental returns on corporate bonds versus government bonds of comparable durations. The approach of some corporate-bond
Patrick Wall is considering the purchase of one of the two bonds described in the following table. Wall realizes his decision will depend primarily on effective duration, and he believes that
You are the manager for the bond portfolio of a pension fund. The policies of the fund allow for the use of active strategies in managing the bond portfolio.It appears that the economic cycle is
A member of a firm’s investment committee is very interested in learning about the management of fixed-income portfolios. He would like to know how fixed-income managers position portfolios to
Carol Harrod is the investment officer for a $100 million U.S. pension fund. The fixed-income portion of the portfolio is actively managed, and a substantial portion of the fund’s large
Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, 7% coupon, 10-year maturity, option-free
Noah Kramer, a fixed-income portfolio manager based in the country of Sevista, is considering the purchase of a Sevista government bond. Kramer decides to evaluate two strategies for implementing his
As part of your analysis of debt issued by Monticello Corporation, you are asked to evaluate two of its bond issues, shown in the following table.a. Using the duration and yield information in the
What monetary and fiscal policies might be prescribed for an economy in a deep recession?
If you believe the U.S. dollar will depreciate more dramatically than do other investors, what will be your stance on investments in U.S. auto producers?
What are the differences between bottom-up and top-down approaches to security valuation? What are the advantages of a top-down approach?
What characteristics will give firms greater sensitivity to business cycles?
Unlike other investors, you believe the Fed is going to loosen monetary policy. What would be your recommendations about investments in the following industries?a. Gold miningb. Construction
According to supply-side economists, what will be the long-run impact on prices of a reduction in income tax rates?
Which of the following is consistent with a steeply upwardly sloping yield curve?a. Monetary policy is expansive and fiscal policy is expansive.b. Monetary policy is expansive while fiscal policy is
Which of the following is not a governmental structural policy that supply-side economists believe would promote long-term growth in an economy?a. A redistributive tax system.b. A promotion of
Consider two firms producing smart phones. One uses a highly automated robotics process, whereas the other uses workers on an assembly line and pays overtime when there is heavy production demand.a.
Here are four industries and four forecasts for the macroeconomy. Match the industry to the scenario in which it is likely to be the best performer.Industry Economic Forecasta. Housing
In which stage of the industry life cycle would you place the following industries?a. Oil well equipment.b. Computer hardware.c. Computer software.d. Genetic engineering.e. Railroads.
For each pair of firms, choose the one that you think would be more sensitive to the business cycle.a. General Autos or General Pharmaceuticals.b. Friendly Airlines or Happy Cinemas.
Why do you think the index of consumer expectations is a useful leading indicator of the macroeconomy?A. Leading indicators1. Average weekly hours of production workers (manufacturing)2. Initial
Why do you think the change in the index of labor cost per unit of output is a useful lagging indicator of the macroeconomy? A. Leading indicators1. Average weekly hours of production workers
General Weedkillers dominates the chemical weed control market with its patented product Weed-ex. The patent is about to expire, however. What are your forecasts for changes in the industry?
Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.a. What are expected profits
The researchers at IAAI have forecasted positive trends for both job creation and consumer confidence. Which, if either, of these trends should have a positive affect on stock prices?Institutional
Stock prices are useful as a leading indicator. To explain this phenomenon, which of the following is most accurate? Stock prices:a. Predict future interest rates and reflect the trends in other
IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?a. Credit risk premiums may be useful to IAAI because they
If the French home currency were to greatly appreciate in value compared to the English currency, what is the likely impact on the competitive position of the East Winery?a. Make the firm less
Which of Smith€™s points effectively support the conclusion that consumers have strong bargaining power over the industry?Mary Smith, a Level II CFA candidate, was recently hired for an
Smith notes in her report that the West Winery might differentiate its wine product on attributes that buyers perceive to be important. Which of the following attributes would be the most likely area
Smith knows that a firm€™s generic strategy should be the centerpiece of a firm€™s strategic plan.On the basis of a compilation of research and documents, Smith makes three
Briefly discuss what actions the U.S. Federal Reserve would likely take in pursuing an expansionary monetary policy using each of the following three monetary tools:a. Reserve requirements.b. Open
An unanticipated expansionary monetary policy has been implemented. Indicate the impact of this policy on each of the following four variables:a. Inflation rate.b. Real output and employment.c. Real

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