# study questions

Wachowicz Corporation issued 15-year, noncallable, 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? $1,077.01

$1,104.62

$1,132.95

$1,162.00

$1,191.79

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price? 1,063.09

1,090.35

1,118.31

1,146.27

1,174.93

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) Preferred stockCommon stock ($10 par) Retained earnings Total debt and equity

$10,000,000 2,000,000 10,000,000 4,000,000 $26,000,000

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt? $5,276,731

$5,412,032

$5,547,332

$7,706,000

$7,898,650

n = 10 X 2 periods = 20 Annual rate 4% so I/Y = 4%/2 = 2% PMT = (% annual coupon X par value) / 2 = (4% X 1000) / 2 = 20 FV= 1,000 4. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*? 2.59%

2.88%

3.20%

3.52%

3.87%

Basic equation: r = r* + IP + MRP + DRP + LP

rT-bond5.50%

IP 1.90%

MRP 0.40%

LP and DRP0.00%

r* = rT-bond – IP – MRP3.20%

Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk- free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, 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 inflation premium (IP) on 5-year bonds? 1.40%

1.55%

1.71%

1.88%

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys' bonds is LP = 0.75% 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 default risk premium (DRP) on Keys' bonds? 0.99%

1.10%

1.21%

1.33%

1.46%

r = r* + IP + MRP + DRP + LP

corp bond=risk free rate +LP + drp+ mrp (maturity risk premium is already built into the Tbond rate) 7.0%=3.0% + .75% + DRP + ((51) x 0.1%) 7.0%=3.0% + .75% + DRP + .004 Niendorf Corporation'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 Niendorf'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 Niendorf's bonds? 0.49%

0.55%

0.61%

0.68%

0.75%

corp bond=risk free rate +LP + drp+ mrp 6.75 = 2.75 + LP + 1.20 + (t1) X 0.1% Kristina Raattama holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875. Stock A B Investment Beta $ 50,000 0.50 50,000 0.80 C D Total 50,000 1.00 50,000 1.20 $200,000 If Kristina replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be? a. 1.07

b. 1.13

c. 1.18

d. 1.24

e. 1.30

You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b =...

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