Exam 5: Bonds, Bond Valuation, and Interest Rates

Squire Inc.'s 5-year bonds yield 6.75%,and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%,the inflation premium for 5-year bonds is IP = 1.65%,the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds,and the maturity risk premium for all bonds is found with the formula MRP = (t − 1)× 0.1%,where t = number of years to maturity.What is the liquidity premium (LP)on Squire's bonds?

Which of the following statements is CORRECT?

McCurdy Co.'s Class Q bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months),and those bonds sell at their par value.McCurdy's Class P bonds have the same risk,maturity,and par value,but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Which of the following statements is CORRECT?

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called. )

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

Which of the following statements is CORRECT?

If the required rate of return on a bond (r_d)is greater than its coupon interest rate and will remain above that rate,then the market value of the bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question. )

Which of the following bonds has the greatest interest rate price risk?

Which of the following statements is CORRECT?

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Ranger Inc.would like to issue new 20-year bonds.Initially,the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

Jerome Corporation's bonds have 15 years to maturity,an 8.75% coupon paid semiannually,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Which of the following statements is CORRECT?