Finance 303 - Financial Management » Spring 2023 » Quiz 4

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Question #1
Which of the following factors would be most likely to lead to an increase in nominal interest rates?
A.   The economy falls into a recession.
B.   The Federal Reserve decides to try to stimulate the economy.
C.   Households reduce their consumption and increase their savings.
D.   A new technology like the Internet has just been introduced, and it increases investment opportunities.
Question #2
A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?
A.   The bond’s current yield is less than 8%.
B.   If the yield to maturity increases, then the bond’s price will increase.
C.   The bond’s coupon rate is less than 8%.
D.   If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.
Question #3
Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.00%, based on semiannual compounding. What is the bond’s price?
A.   $1,457.85
B.   $1,235.47
C.   $976.02
D.   $1,050.15
Question #4
A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?
A.   The bond’s expected capital gains yield is zero.
B.   If the bond’s yield to maturity declines, the bond will sell at a discount.
C.   The bond’s yield to maturity is above 9%.
D.   The bond’s current yield is above 9%.
Question #5
Which of the following statements is CORRECT?
A.   If the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
B.   If the maturity risk premium (MRP) equals zero, the Treasury bond yield curve must be flat.
C.   If the expectations theory holds, the Treasury bond yield curve will never be downward sloping.
D.   If inflation is expected to increase in the future and the maturity risk premium (MRP) is greater than zero, the Treasury bond yield curve must be upward sloping.
Question #6
Banorte Inc's bonds currently sell for $870 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?
A.   8.66%
B.   8.02%
C.   9.71%
D.   7.38%
Question #7
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?
A.   The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
B.   It is impossible to tell without knowing the relative risks of the two securities.
C.   It is impossible to tell without knowing the coupon rates of the bonds.
D.   The yield on a 10-year bond would be less than that on a 1-year bill.
Question #8
Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.65%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
A.   1.22%
B.   1.34%
C.   1.10%
D.   0.86%
Question #9
Which of the following statements is CORRECT?
A.   The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
B.   Under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated.
C.   All else equal, senior debt has more default risk than subordinated debt.
D.   All else equal, secured debt is more risky than unsecured debt.
Question #10
Which of the following statements is CORRECT?
A.   The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
B.   The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
C.   The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
D.   The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.

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