3. Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:

T-bond = 7.72% A = 9.64%

AAA = 8.72% BBB = 10.18%

6. Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, the convertible, callable bond with the sinking fund, to have it sell initially at par?

a. The coupon rate should be exactly equal to 6%.

b. The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.

c. The rate should be slightly greater than 6%.

d. The rate should be over 7%.

e. The rate should be over 8%.

7. Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

a. Because of the call premium, the required rate of return would decline.

b. There is no reason to expect a change in the required rate of return.

c. The required rate of return would decline because the bond would then be less risky to a bondholder.

d. It is impossible to say without more information.

e. The required rate of return would increase because

8. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?

a. The bonds yield to maturity is above 9%.

b. The bonds current yield is above 9%.

c. The bonds expected capital gains yield is zero.

d. If the bonds yield to maturity declines, the bond will sell at a discount.

e. The bonds current yield is less than its expected capital gains yield.

12. Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

a. Bond 8s current yield will increase each year.

b. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.

c. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.

d. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.

e. Over the next year, Bond 8s price is expected to decrease, Bond 10s price is expected to stay the same, and Bond 12s price is expected to increase.

15. Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

a. 10-year, zero coupon bond.

b. 20-year, zero coupon bond.

c. 20-year, 5% coupon bond.

d. 1-year, 10% coupon bond.

e. 20-year, 10% coupon bond

24. Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

a. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

b. Stock Y's expected return during the coming year will be higher than Stock X's return.

c. If the expected rate of inflation is zero and the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.

d. Stock Y's return has a higher standard deviation than Stock X.

e. If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.