MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%

MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bond's price.

A) $956.42

B) $1,000.00

C) $1,168.31

D) $1,213.19

Davis & Davis issued $1,000 par value bonds at 102. The bonds pay 12% interest annually and mature in 30 years. The market rate of interest is (round to the nearest hundredth of a percent)

A) 12.00%.

B) 11.71%.

C) 10.12%.

D) 11.29%.

What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments.

A) 21.81%

B) 6.14%

C) 12.28%

D) 11.43%

What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911?  Assume annual coupon payments.

A) 7.81%

B) 15.36%

C) 15.61%

D) 16.22%

What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi-annually, has a par value of $1,000, matures in five years, and is currently selling for $1071?

A) 7.28%

B) 8.40%

C) 3.64%

D) 4.21%

What is the value of a bond that has a par value of $1,000, a coupon rate of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10.

A) $320.66

B) $1,011.00

C) $813.80

D) $790.79

What is the value of a bond that matures in three years, has an annual coupon payment of $110, and a par value of $1,000? Assume a required rate of return of 11%, and round your answer to the nearest $10.

A) $970

B) $1,330

C) $330

D) $1,000

Bond ratings directly affect a bond's

A) spread over the Treasury yield.

B) coupon rate.

C) maturity date.

D) call provisions.

The discount rate used to value a bond is

A) the coupon interest rate.

B) determined by the issuing company.

C) fixed for the life of the bond.

D) the market rate of interest.

The Blackburn Group has recently issued 20-year, unsecured bonds rated BB by Moody's

The Blackburn Group has recently issued 20-year, unsecured bonds rated BB by Moody's. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%.  The yield to maturity on these bonds is

A) 4.43%.

B) 7.19%.

C) 12.23%.

D) mortgage bonds.

Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar)

A) $1,173.

B) $743.

C) $1,000.

D) $827.

Caldwell, Inc. sold an issue of 30-year, $1,000 par value bonds to the public. The bonds carry a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current market rate of interest on the Caldwell bonds is 8.45%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.

A) $751

B) $1,177

C) $1,220

D) $976

The yield to maturity on a bond

A) is fixed in the indenture.

B) is lower for higher-risk bonds.

C) is the required return on the bond.

D) is generally equal to the coupon interest rate.

All of the following affect the value of a bond EXCEPT

A) investors' required rate of return.

B) the recorded value of the firm's assets.

C) the coupon rate of interest.

D) the maturity date of the bond.

A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900. The yield to maturity

A) is 10%.

B) is greater than 10%.

C) is less than 10%.

D) cannot be determined.

Sterling Corp. bonds pay 10% annual interest and are selling at 97. The market rate of interest

A) is less than 10%.

B) is greater than 10%.

C) equals 10%.

D) cannot be determined.

The detailed legal agreement between a bond's issuer and its trustees is known as the

The detailed legal agreement between a bond's issuer and its trustees is known as the

A) collateral agreement.

B) call provision.

C) indenture.

D) covenant.

The issuance of bonds to raise capital for a corporation

A) magnifies the returns to the stockholders.

B) increases risk to the stockholders.

C) is a cheaper form of capital than the issuance of common stock.

D) all of the above.

A(n)________ is used to outline the issuing company's contractual obligations to bondholders.

A) mortgage

B) debenture

C) bond rating

D) indenture

Bonds with ratings lower than Standard & Poor's BBB or Moody's Baa are classified as

A) in default.

B) investment grade.

C) not investment grade.

D) medium quality.

Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date?

A) The call provision

B) Convertibility

C) Floating rate

D) The priority of claims

The par value of a corporate bond indicates the level of interest payments that will be paid to investors.

Answer:  FALSE

Any unsecured long-term debt instrument is a debenture.

Answer:  TRUE

A conversion feature confers the option of redeeming a bond for the company's stock rather than cash.

Answer:  TRUE

The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.

Answer:  FALSE

The current yield is the average rate of interest a bond will from the time of purchase until it matures.

Answer:  FALSE

If the issuing company becomes insolvent, the claims of the bondholders are honored before those of preferred stockholders.

Answer:  TRUE

Advantages of privately placing debt include all of the following EXCEPT

Advantages of privately placing debt include all of the following EXCEPT

A) speed.

B) reduced placement costs.

C) restrictive covenants.

D) flexibility.

The par value of a bond

A) never equals its market value.

B) is determined by the investor.

C) generally is $1,000.

D) is never returned to the bondholder.

The interest on corporate bonds is typically paid

A) semiannually.

B) annually.

C) quarterly.

D) monthly.

On any given day, a bond can be issued at

A) a discount.

B) a premium.

C) par.

D) all of the above.

Advantages to borrowing in the private market include

A) less restrictive covenants.

B) reduced initial costs.

C) lower interest costs.

D) avoiding future SEC registration.

Corporate debt can be privately placed with

A) union pension funds.

B) life insurance companies.

C) state pension funds.

D) all of the above

Which of the following is generally NOT a characteristic of a bond?

A) Voting rights

B) Par value

C) Claims on assets and income

D) Indenture

Asset A has a required return of 18% and a beta of 1.4. The expected market return is 14%

Asset A has a required return of 18% and a beta of 1.4. The expected market return is 14%. What is the risk-free rate? Plot the security market line.

Answer:  

K = Krf + (Km - Krf)b

18% = X + (14% - X)1.4

18% - X =19.6% - 1.4X

.4X = 1.6%

X = 4% = Risk - free Rate = Krf

The return for the market during the next period is expected to be 11.5%; the risk-free rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.

Answer: 

K = 2.5% + 1.5(11.5% - 2.5%) = 16%

Security A has an expected rate of return of 22% and a beta of 2.5. Security B has a beta of 1.20. If the Treasury bill rate is 2.0%, what is the expected rate of return for security B?

Answer: 

RA = RF + BA(Rm - Rf)

.22 = .02 + 2.5 (Rm - .02)

.20 = 2.5 (Rm - .02) = 2.5 Rm - .05

.25 = 2.5 Rm 

.10 = Rm 

RB = Rf + BB(Rm - Rf)

RB = .02 + 1.20(.10 - .02)

RB = .116 or 11.6%

AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?

Answer:  Required Rate of Return = Risk-Free Rate + (Market Return - Risk-Free Rate) × Beta = 5.7% + (13.2% - 5.7%) × 0.656 = 10.62%

You are thinking about purchasing 1,000 shares of stock in the following firms:

You are thinking about purchasing 1,000 shares of stock in the following firms:

                                               

                                 Number of Shares             Firm's Beta

        Firm A                          100                                  0.75

        Firm B                          200                                  1.47

        Firm C                          200                                  0.82

        Firm D                          600                                  1.60

If you purchase the number of shares specified, then the beta of your portfolio will be:

A) 1.16.

B) 1.35.

C) 1.00.

D) Cannot be determined without knowing the stock prices.

Use the following information to answer the following question(s).

                                                                Beta

        Market                                           1

        Firm A                                           1.25

        Firm B                                           0.6

Market Return            10%               Risk Free Rate     2%

The market risk premium is

A) 2%.

B) 4%.

C) 6%.

D) 8%.

Firm A's risk premium is

A) 4%.

B) 6%.

C) 8%.

D) 10%.

Firm B's risk premium is

A) 2.66%.

B) 4.8%.

C) 6.3%.

D) 8.1%.

The required rate of return for Firm A is

A) 8%.

B) 12%.

C) 16%.

D) Cannot be determined with information given.

U. S. Treasury bills can be used to approximate the risk-free rate.

Answer:  TRUE

Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.

Answer:  FALSE

The market beta changes frequently with economic conditions.

Answer:  FALSE

The S&P 500 Index is commonly used to estimate the market rate of return.

Answer:  TRUE

The security market line (SML) intercepts the Y axis at the risk-free rate.

Answer:  FALSE

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Answer:  TRUE

If investors expected inflation to increase in the future, the SML would shift up, but the slope would remain the same.

Answer:  TRUE

If investors became more risk averse The SML would shift downward and the slope of the SML would fall.

Answer:  FALSE

A security with a beta of zero has a required rate of return equal to the overall market rate of return.

Answer:  FALSE

The rate on six-month T-bills is currently 5%. Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%

The rate on six-month T-bills is currently 5%. Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%. According to CAPM, determine the return on the market portfolio.

A) 11.15%

B) 6.15%

C) 17.07%

D) 14.11%

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:

Project 1                                                        Project 2

Standard Deviation 12%                         Standard Deviation 19.5%

Probability                 Return                    Probability                Return

50% Chance              20%                         30% Chance              30%

50% Chance              -4%                          40% Chance              10%

                                                                        30% Chance              -20%

Project 3

Standard Deviation 12%

Probability                 Return

10% Chance              30%

40% Chance              15%

40% Chance              10%

10% Chance              -21%

If you are a risk-averse investor, which one should you choose?

A) Project 1

B) Project 2

C) Project 3

The expected return on the market portfolio is currently 11%. Battmobile Corporation stockholders require a rate of return of 23.0%, and the stock has a beta of 2.5. According to CAPM, determine the risk-free rate.

A) 17.5%

B) 2.75%

C) 3.0%

D) 9.2%

Hefty stock has a beta of 1.2. If the risk-free rate is 7% and the market risk premium is 6.5%, what is the required rate of return on Hefty?

A) 14.8%

B) 14.4%

C) 12.4%

D) 13.5%

The market risk premium is measured by

A) beta.

B) market return less risk-free rate.

C) T-bill rate.

D) standard deviation.

Marjen stock has a required return of 20%. The expected market return is 15%, and the beta of Marjen's stock is 1.5. Calculate the risk-free rate.

A) 4%

B) 5%

C) 6%

D) 7%