I need answers for these questions please. There are 10 questions: some with calculations and some are conceptual. Thank you!!!

Version A FIN 350, 15F Fin 350 - Business Finance Quiz 2 NAME:______________________ SECTION: ___________ Due Date: November 4, 2015 Answer All Questions. Read all the answers carefully and select the best answer for each question. 1. A 30-day T-bill is currently yielding 5.5%. The following information is available: inflation premium = 3.60%, liquidity premium = 0.6%, maturity risk premium = 1.8% and default risk premium = 2.15%. On the basis of these data, the nominal risk-free rate is ____________ and the real risk-free rate is _________________. a) 5.5%; 2.5% b) 5.5%; 1.9% c) 1.5%; 3.0% d) 0.5%; 0.1% e) 2.5%; 5.5% 2. Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 2.10%. Suppose further that the maturity risk premium on a 10-year T-bond is 0.9%, that no maturity risk premium is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years? a) 1.80% b) 2.00% c) 1.90% d) 2.10% e) 2.20% 3. If the yield curve is downward sloping, which of the following statements is correct? (hint: graph the yield curves for a Tbond, a AAA bond, and a B bond) a) The yield on the 5-year T-bond must exceed the yield on the 10-year AAA corporate bond. b) The yield on the 5-year AAA corporate bond must exceed the yield on 5-year B corporate bond. c) The yield on the 5-year AAA corporate bond must be lower the yield on the 5-year T-bond. d) The yield on the 5-year T-bond must exceed the yield on the 5-year AAA corporate bond. e) The yield on the 10-year T-bond must be less than the yield on a 2-year T-bond. 4. You observe the following yield curve for Treasury securities: Maturity Yield 1 year 5.5% 2 years 5.8% 3 years 6.0% 4 years 6.3% 5 years 6.5% Assume that the pure expectations hypothesis holds. What is the predicted interest cost if you plan to borrow for 3 years, starting 2 year from today? a) 6.75% b) 6.30% c) 6.97% d) 6.40% e) 7.30% 5. A bond with a face value of $1,000 matures in 9 years and has a 7% semiannual coupon. The bond currently sells for $846. You would pay $846 for each bond if you think that a \"fair\" market interest rate (discount rate) for such bonds is ____. (hint: find out what is the nominal yield to maturity first) a) 8.67% b) 10.24% c) 12.53% d) 11.28% e) 15.60% 1 Version A FIN 350, 15F Consider a $1,000 par value bond with a 7% annual coupon. The bond pays interest annually. There are 20 years remaining until maturity. You have expectations that in 5 years the YTM on a 15-year bond with similar risk will be 7.5%. 6. What is the expected bond value in 5 years? a) $1042 b) $1132 c) $1153 d) $ 956 e) $ 949 Last year, you purchased a $1,000 par value bond with a 7.5% annual coupon and a 20-year maturity. At the time of the purchase, it had an expected YTM of 8%. After receiving the coupon, you sold the bond today for $930. What is your return rate in one year? 7. What is your return rate in one year? (Hint: find out how much did you pay for the bond last year?) a) 18.28% b) 2.75% c) 6.64% d) -2.11% e) 5.68% 8. Which of the following statements is most correct? a) All else equal, 20-year AAA bonds have less reinvestment rate risk than 3-year AAA bonds. b) All else equal, 20-year T-bonds have less interest rate risk than 5-year T-bonds. c) All else equal, bonds with 5% coupon rate have more reinvestment rate risk than bonds with 10% coupon rate. d) All else equal, bonds with 5% coupon rate have less interest rate risk than bonds with 10% coupon rate. e) All else equal, zero coupon bonds have highest reinvestment rate risk. 9. Assume that all interest rates in the economy decline from 10 percent to 9 percent. Which of the following bonds will have the largest percentage increase in price? a) An 8-year bond with a 9% coupon. b) A 10-year bond with a 10% coupon. c) A 10-year zero coupon bond. d) A 3-year bond with a 10% coupon. e) A 1-year bond with a 15% coupon. Given the following probability distribution, calculate the expected return, standard deviation and the CV for Portfolio AJ where you invest $3000 in Security A and $2000 in Security J. State 1 Probability 0.2 rA 10% rJ 35% 2 0.6 15% 20% 3 0.2 20% 5% 10. What is the coefficient of variation for Portfolio AJ? a) 0.43 b) 0.11 c) 0.47 d) 0.24 e) 0.67 2