BUSINESS

1. Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds? (Points : 2)

5.56%

5.85%

6.14%

6.45%

 

Question 2. 2. Tom O’Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio’s beta?

(Points : 2)

1.17

1.23

1.29

1.35

 

Question 3. 3. Desreumaux Inc.’s stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

(Points : 2)

5.80%

5.95%

6.09%

6.25%

 

Question 4. 4. Wachowicz Corporation issued 15-year, non-callable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. 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? (Points : 2)

$1,077.01

$1,104.62

$1,132.95

$1,191.79

 

Question 5. 5. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value. (Points : 2)

True

False

 

Question 6. 6. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly. (Points : 2)

True

False

 

Question 7. 7. Which of the following statements is CORRECT? (Points : 2)

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

An indenture is a bond that is less risky than a mortgage bond.

The expected return on a corporate bond will generally exceed the bond’s yield to maturity.

If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.

 

Question 8. 8. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par? (Points : 2)

Adding additional restrictive covenants that limit management’s actions.

Adding a call provision.

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

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

 

Question 9. 9. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? (Points : 2)

The company’s bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company’s financial situation deteriorates significantly.

 

 

Question 10. 10. If a firm raises capital by selling new bonds, it is called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk. (Points : 2)

True

False

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