Question
True or false (no explanation required) 1. All bonds have a fixed coupon. 2. All bonds have a fixed par value. 3. Failure to pay
True or false (no explanation required)
1.All bonds have a fixed coupon.
2.All bonds have a fixed par value.
3.Failure to pay a preferred stock dividend can trigger bankruptcy.
4.Failure to pay a bond coupon payment can trigger bankruptcy.
5-If interest rates fall, the price of a non-convertible bond will fall.
6-In the US, the mortgage backed security market is larger than the corporate public debt market.
7-Bond prices move primarily because of changes in default risk.
8- Suppose Pfizers stock price increase by 5% today, we would expect that the price of its bonds would also increase.
9- If we currently hold only one stock with a standard deviation of .2 we would increase our portfolios standard deviation if we also invested in a stock with a standard deviation of .3.
10- The capital asset pricing model (CAPM) would work well for social media firms.
11- A reasonable way to estimate the beta of a large US firm would be to regress the prices of its stock against the prices of the S&P500 index for the last two years.
12- The b of a portfolio consisting of $1 million invested in the S&P500 and $2 million invested in US government bonds is 1.
13- Book value leverage is typically higher than market value leverage.
14- The benefit of diversification increases as the correlation increases.
15- Most US corporate bonds are: I. Callable II. Convertible III. Investment grade a. III only b. I and II only c. I and III only d. I, II and III
16.The average maturity of US corporate bonds issued in 2015 was ____ years. a. 5 b. 8 c. 12 d. 17 e. 25
Suppose a preferred stock issue has an annual dividend of $6 and a yield of 7%.
17- What is the price of this preferred if the next dividend is in exactly one year?
18.What is the price of this preferred if the next dividend is in exactly 4 months?
19.What is the price of this preferred if the next dividend is in exactly 4 years?
20.What is the price of this preferred if the next dividend is in exactly one year and the issue is currently callable at $75?
Suppose Cunningham Inc. has issued the following convertible bond: par value = $1000; 3% coupon paid annually; 10 year maturity; B-rated with 10-year B yields currently 7%; conversion ratio = 20; current Cunningham stock price = $35.
21- What is the straight bond value (the value if it was not convertible)?
22- What is the conversion value?
23- Given the above data, the price of the Cunningham bond will move because of: I. Shifts in interest rates II. Shifts in Cunninghams stock price a. I only b. II only c. I and II d. None of the above
Suppose your firm has decided to obtain a $100 million mortgage to finance its new office building. Assume it is a 30-year mortgage at a rate of 7% with annual payments, the first beginning in exactly one year.
24- What is the annual mortgage payment?
25- After 6 payments have been made, what is the remaining loan balance?
26- Suppose now that you agree to make a balloon payment of $50 million at the maturity date. What is the new annual payment on the mortgage?
Assume the following information on 2 US large cap equity mutual funds. The asset C is an equally weighted portfolio of A and B. Assume the riskless rate is 2%. Assume A and B have zero correlation and that the SPX return is 10%.
| A | B |
Mean annual return | .08 | .10 |
Standard deviation of annual return | .25 | .30 |
Beta | .6 | 1 |
27- What is the standard deviation of C?
28- If the correlation between A and B was positive would the standard deviation of asset C be higher or lower than the figure obtained in the previous question?
29.Does asset C have a higher expected excess return than the SPX?
30.Is it likely that A and B have zero correlation?
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