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S. Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par value) reported. You observe and conclude

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S. Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par value) reported. You observe and conclude that 1 bond is correct and some bonds are wrong with certainty. Indicate which bond is correct and which 3 bonds seem to be reported incorrectly Bond Price U 100 96 W 110 X 105 Y 107 Coupon Rate(%) Required Yield(%) Bond U price is correct while Bond W, X and Z prices are incorrect b. a. Bond V price is correct while Bond X, Y and Z prices are incorrect Bond V price is correct while Bond U, X, and Y prices are incorrect d. c. Bond Z price is correct while Bond V, X and Y prices are incorrect e. None of the above choices 6. Which of the following statement(s) is/are true? I. There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. II. The par value for bond XYZ is S1,000 and it is being sold at a premium. This means the XYZ bond price is greater than $1,000 III. A zero-coupon bond is a bond that pays no interest and is offered (and initially sells) at a par. These bonds provide compensation to investors in the form of capital appreciation d. e. I & II only None of the above choices a. I only b. II only c. III only 7. Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond-7.72% AAA 8. 72% A-9.64% BBB-10.18% The differences in these rates were probably caused primarily by: a. Real risk-free rate differences b. Default and liquidity risk differences. c. Tax effects. d. Inflation differences. e. Maturity risk differences. 8. Assume that the rate on a 1-year bond is now 6%, but all investors expect 1-year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the maturity risk premium equals zero. Which of the following statements is CORRECT? The interest rate today on a 3-year bond should be approximately 7%. a. b. The interest rate today on a 3-year bond should be approximately 8%. C. The interest rate today on a 2-year bond should be approximately 6%. d. The interest rate today on a 2-year bond should be approximately 7%. e. None of the above choices 9. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000), which of the following statement(s) is/are correct? I. If the bond's yield to maturity declines, the bond will sell at a premium. II. The bond's current yield is less than its expected capital gains yield. III. The bond's expected capital gains yield is zero. a. Ionly b. II only c. III only d. 1& II only e. None of the above choices

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