### Objective type questions on bond valuation

Assignment Help Finance Basics
##### Reference no: EM1311033

Objective type questions on bond valuation.

1. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10 % (t), where it is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

A. 5.95%

B. 6.05%

C. 6.15%

D. 6.25%

E. 6.35%

2. If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

A. 2.00%

B. 2.10%

C. 2.20%

D. 2.30%

E. 2.40%

3. Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 2.10%. Suppose further that the MRP on a 10-year T-bond is 0.9%, that no MRP is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

A. 1.80%

B. 1.90%

C. 2.00%

D. 2.10%

E. 2.20%

4. Suppose the rate of return on a 10-year T-bond is 5.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 2.10%. Suppose further that the expected average rate of inflation over the next 10 years is 2.0%, that the MRP on a 10-year T-bond is 0.9%, that no MRP is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the real risk free rate of return, r*? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

A. 1.70%

B. 1.80%

C. 1.90%

D. 2.00%

E. 2.10%

5. The real risk-free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year Treasury bond?

A. 4.90%

B. 5.00%

C. 5.10%

D. 5.20%

E. 5.30%

6. Walker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bond non-callable. If the bond were made callable after 5 years with a 5% call premium, how would this affect the bond's required rate of return?

B. Because of the call premium, the required rate of return would decline.

C. There is no reason to expect a change in the required rate of return.

D. The required rate of return would decline because the bond would then be less risky to a bondholder.

E. The required rate of return would increase because the bond would then be more risky to a bondholder.

7. Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%?

A. 20-year, zero coupon bond.

B. 10-year, zero coupon bond.

C. 20-year, 10% coupon bond.

D. 20-year, 5% coupon bond.

E. 1-year, 10% coupon bond.

8. Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par?

D. The rating agencies change the bond's rating from Baa to Aaa.

E. Making the bond a first mortgage bond rather than a debenture

#### Questions Cloud

 The specific weight of the unknown liquid : The manometer tube has an internal diameter of 0.5 cm and it is initially filled with water. Exactly 2 cm3 of an unknown liquid is then poured into one leg of the manometer, and a displacement of 5 cm between the surfaces is measured as shown. Fin.. Objective type questions on current assets and liabilities : Objective type questions on current assets and liabilities and Which of the following statements is CORRECT Calculate the force acting on the body : Starting from rest, a 40 kg body reaches a speed of 8.0m/s in 2s. Calculate the force acting on the body? Essay on deviant-criminal behavior and race-ethnicity : Essay about deviant/criminal behavior and race/ethnicity. Write an essay that focuses on a particular deviant/criminal behavior and race/ethnicity. Objective type questions on bond valuation : Objective type questions on bond valuation and Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par Calculate the force required to move an object. : Calculate the force required to move an object. Objective type question on bond valuation : Objective type question on bond valuation and Which of the following has the greatest interest rate price risk Find the force to keep object moving : Find the force to keep object moving. Objective type questions on preferred stock : Objective type questions on preferred stock and If markets are in equilibrium then what will occur

### Write a Review

#### Case study - green mountain coffee roasters

Case study: Green Mountain Coffee Roasters, Inc. (GMCR).

#### Given the information on the company

You are given the information on the company. Total market value is= \$38 million. Company's capital structure, given here, is considered to be optimal.

#### Computation of yield to maturity and current market price

Computation of yield to maturity and current market price of the bonds and what is the difference in current market prices of the two bonds

#### Compute of bond''s yield to maturity

Compute of bond's yield to maturity and The firm is in financial distress and firm will not be able to repay the principle

#### Computing cost to evaluate items using decrement factor

After analyzing a sample of remaining 480 items, you determine that sample is overpriced by 6%. By using this 6% decrement factor, what cost must you evaluate for those items?

#### Computing the annual present value cost of maintenance

Compute the annual present value cost of maintenance (15 years).

#### Calculation of rate of return using pure expectations theory

Calculation of Rate of Return using Pure Expectations Theory and calculation of real risk-free rate of return

#### Compute the cost of borrowing by using debt

Based on information given above, compute the cost of borrowing by using debt for present company.

#### Define the different way of transfer of suppliers of capital

Define the different way of transfer of suppliers of capital, describe the different methods of transfer of suppliers of capital to demanding capital

#### Stock valuation beneath equilibrium situation

Stock valuation beneath equilibrium situation and Assuming the stock market is efficient and the stocks are in equilibrium

#### Calculation of npv & irr of uneven cash flows

Calculation of NPV & IRR of uneven Cash Flows and Comparing NPV & IRR between two Investment options.

#### Investment to make contributions to employer-s fund

If John suppose his investments would earn 8% annually, and his life expectancy is 80 years, must he invest in his own plan or must he make contributions to his employer's fund?