If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

a. 1.90%

b. 2.09%

c. 2.30%

d. 2.53%

e. 2.78%

Kern Corporations 5-year bonds yield 7.30% and 5-year T-bonds yield 4.10%. The real risk-free rate is r* = 2.5%, the default risk premium for Kerns bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kerns bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on all 5-year bonds?

a. 1.20%

b. 1.32%

c. 1.45%

d. 1.60%

e. 1.68%

3. A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is most correct?

a. The bonds yield to maturity is greater than its coupon rate.

b. If the yield to maturity stays constant until the bond matures, the bonds price will remain at $850.

c. The bonds current yield is equal to the bonds coupon rate.

d. The bonds yield to maturity is the same as capital gain yield.

e. All of the statements above are correct.

4. A 20-year maturity, $1,000 face value bond has a 9% annual coupon, and a yield to maturity of 8%. What is the price of the bond?

$1,000 b. $1,098.18 c. $1,210.21 d. $998.33

5. 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 expected capital gains yield is zero.

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

c. The bonds current yield is above 9%.

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.

6. What is the yield to maturity on a bond that pays annual coupon rate of 14%, has a par value of $1,000, matures in 10 years, and is selling for $911?

12.18% b. 13.39% c. 15.83% d. 17.79%

7. A 30-year bond with 8 percent annual coupon has a face value of $1,000. The bonds yield to maturity is 7 percent. What is the bonds current yield (i.e., coupon / price)?

6.38% b. 7.12% c. 8.15% d. 10.00%

8. Due to numerous lawsuits, major chemical manufacturer has recently experienced a market reevaluation. The firm has 15-year, 8% coupon bond, paid semiannually and par value of $1,000. The required nominal rate (yield) on this debt has now risen to 10%. What is the current price of this bond?

$434.39 b. $846.28 c. $847.88 d. $1,000

9. A 30-year, $1,000 par value bond has a 7% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

$929.12 b. $938.23 c. $945.34 d. $1,000

10. High Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a 10 percent annual coupon and have a 20-year maturity, but they can be called in 5 years at call price of $1,120. What is the yield to call?

5.67% b. 5.78% c. 6.12% d. 7.34%

11. Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (r_d) is 6.20%, based on semiannual compounding. What is the bonds price?

a. $1,047.19

b. $1,074.05

c. $1,101.58

d. $1,129.12

e. $1,157.35

12. Assume that interest rates on 20-year Treasury and 20-year corporate bonds are as follows:

T-bond = 7.72% AAA = 8.72% A = 9.64% BB = 10.18%

The differences in these rates were probably caused primarily by:

a. Tax effects.

b. Inflation differences.

c. Maturity risk differences.

d. Default risk differences.

e. Real risk-free rate differences.

Dothan Inc.s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a 18% return. What is the firms expected rate of return?

7.72%

8.12%

8.55%

9.00%

9.50%

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

The expected return of your portfolio is likely to decline.

The diversifiable risk will remain the same, but the market risk will likely decline.

Both the diversifiable risk and the market risk of your portfolio are likely to decline.

The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

Company A has a beta of 0.70, while Company Bs beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between As and Bs required rates of return?

a. 2.75%

b. 2.89%

c. 3.05%

d. 3.21%

e. 3.38%

Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. Xs beta is 1.50 and Ys beta is 0.70. What is the portfolios beta?

a. 0.65

b. 0.72

c. 0.80

d. 0.89

e. 0.98

Cooley Companys stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firms required rate of return?

a. 11.36%

b. 11.65%

c. 11.95%

d. 12.25%

e. 12.55%

18. The real risk-free rate of interest (r*) is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after. According to the expectations theory, what should be the interest rate on 3-year, risk-free securities today?

6% b. 7% c. 8% d. 9% e. 10%

19. Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The markets required rate of return is 13.25%, the risk-free rate is 7.00%, and the Funds assets are as follows: (hint: market beta = 1.0) (2 pts)

Stock Investment Beta

A $ 200,000 1.50

B 300,000 0.50

C 500,000 1.25

D $1,000,000 0.75

a. 9.58%

b. 10.09%

c. 10.62%

d. 11.18%

e. 11.77%

* Write your correct Answer below:

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