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?