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1) Suppose you purchased a bond with a 5% annual coupon payment that expires in 10. Two years later the risk-free rate is 7%. Have you been exposed to interest rate risk? Have you been exposed reinvestment risk? Briefly explain why and what interest and reinvestment risk are.
2) Assuming all other bond characteristics are identical which bond would pay a higher coupon payment? Very briefly explain why.
a) A callable bond or a convertible bond
b) A bond with negative covenants vs a bond without negative covenants
c) A Treasury Strip or a regular Treasury bond
d) A secured vs unsecured bond
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Your own 5,000 acres of farmland in Kansas and grow feed corn, currently selling at $3 per bushel. You expect to harvest about 1000 bushel per acre in August. Would you take any action regarding the future. What instrument would you use?
You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .47 percent per month. In addition 4% of the amount that you borrow must be deposited in a non-interest-bearing account. What..
Drew recently purchased a new machine for his business. The price of the machine was $12,000, but Drew also paid $100 in sales tax, $300 in freight, and $1,000 in installation and testing costs. What is Drew's basis in the new machine?
A treasury bond that matures in 10 years has a yield of 3.3%. A 10-year corporate bond has a yield of 7% and a default risk premium of 2%. What is the liquidity premium of the corporate bond?
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