For Question 18, use the following information.

On March 28, 2008, Toyota Motor Credit Corp. (TMCC) issued new securities for sale to the public. Under the terms, TMCC promised to repay the owners of the securities $100,000 per share in 2038, 30 years from the offering date, and no interim payment is available between the issuance and the maturity of the securities. Investors paid TMCC $24,099 for each share of these securities.

A) Suppose the required rate of return for the TMCCs securities remains unchanged until the maturity. If you wanted to buy a share of the securities on March 28, 2028, 20 years from the issuance, what would the price of the securities be?

Answer (show the steps/calculation toward your answer):

B) Suppose that when TMCC offered the security in 2008, the U.S. Treasury had offered an essentially identical security. That is, the U.S. Treasury promised to repay $100,000 per share in 30 years from the offering date (no interim payment). Note that the U.S. Treasury securities (T-bill and treasury bonds) are considered riskless, guaranteed by the government, whereas TMCC securities are not. Which of the following is correct? Choose only one.

1. When issued, the price of the Treasury security would be lower than that of TMCC security because the required rate of return for the U.S. Treasury should be higher than TMCC.
2. When issued, the price of the Treasury security would be lower than that of TMCC security because the required rate of return for the U.S. Treasury should be lower than TMCC.
3. When issued, the price of the Treasury security would be higher than that of TMCC security because the required rate of return for the U.S. Treasury should be higher than TMCC.
4. When issued, the price of the Treasury security would be higher than that of TMCC security because the required rate of return for the U.S. Treasury should be lower than TMCC.
5. NONE of the above

Answer: