1. 1 in Nation is expected to be relatively low, then Interest rates will tend to be relatively high, other things held constant 2. True b. False 2. Which of the following statements is CORRECT? 2. If the maturity risk premium (MRP) is greater than rero, the Treasury bond yield curve must be upward sloping b. If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat. c. If inflation is expected to decrease in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be downward sloping. d. If the expectations theory holds, the Treasury bond yield curve will never be downward sloping er inflation is expected to increase in the future and the maturity risk premium (MRP) greater than zero, the Treasury bond yield curve must be upward sloping 3. Ms Parker found two opportunities of investment A (rate of return 4%, standard deviation 4%) and Investment B rate of return 6%, standard deviation 3%). Which one is better for hert (hints calculate each CV and then compare each other) a. Ab. Bc. none 4. Johnson Corporation has 5-year bonds. Inflation premium (IP) on a year bond is 1.00%. The real risk-free rate is 2.80%, the default risk premium for Johnson's bonds is DRP=0.85% versus zero for T-bonds, the liquidity premium on Johnson's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t-1)x 0.1%, where t = number of years to maturity. What is the yield on Johnson Corporation's 5-year bonds? a. 1.40% b. 6.85% c. 1.71% d. 6.30% e. 2.06% 5. Le Corporation's 5-year bonds yield 6.30% and 5-year T-bonds yield 4.80%. The real risk-free rate is r* - 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Le's bonds is DRP 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP-t- 1)x0.1%, wheret number of years to maturity. What is the liquidity premium (LP) on Le's bonds? a. 0.49% b. 0.55% c. 0.61% d. 0.50% e. 0.30% 6. Suppose the interest rate on a 1-year T-bond is 4.0% and that on a 2-year T-bond is 5.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now? a. 7.36% b. 7.01% c. 8.16% d. 6.01% e. 9.04% 7. Bellock's Corporation's bonds have a 10-year maturity, a 5.00% semiannual coupon, and a par value of S1,000. The going interest rate (rd) is 4.00%, based on semiannual compounding. What is the bond's price? a.1.163.51 b.1,090.35 c. 1, 118.31 d.1,146.27 e.1,081.75 XA IS-year bond with a face value of $1,000 currently sells for $900. Which of the following statements is CORRECT? a. The bond's coupon rate exceeds its current yield. b. The bond's yield to maturity or discount rate is more than its coupon rate. c. The bond's yield to maturity or discount rate is less than its coupon rate. d. The bond's current yield is equal to its coupon rate. . Ir the yield to maturity stays constant until the bond matures, the bond's price will remain at 5900 This is the information for the problems 9, 10, 11, 12 and 13. Alexander Inc.' bonds currently sell for 5800 and have a par value of $1.000. They pay a S50 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,200. 9. What is their yield to maturity (YTM)? 5.78% 1.7.64% 6.39% d. 8.04% 6.87%
