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1. D. J. Masson Inc. recently issued non-callable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell? (Points : 2)
Question 2. 2. Maxwell Inc.’s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm’s expected rate of return? (Points : 2)
Question 3. 3. 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)
Question 4. 4. Moerdyk Company’s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm’s required rate of return?
(Points : 2)
Question 5. 5. 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 6. 6. Managers should under no conditions take actions that increase their firm’s risk relative to the market, regardless of how much those actions would increase the firm’s expected rate of return. (Points : 2)
Question 7. 7. 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)
Question 8. 8. 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)
Question 9. 9. Inflation, recession, and high interest rates are economic events that are best characterized as being: (Points : 2)
systematic risk factors that can be diversified away.
company-specific risk factors that can be diversified away.
among the factors that are responsible for market risk.
risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
Question 10. 10. 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.
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