Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond=7.72% A = 9.64% BBB=10.18% AAA = 8.72% The differences in rates among these issues were most probably caused primarily by: O a. Maturity risk differences. O b. Tax effects. c. Default risk and liquidity differences. d. Real risk-free rate differences. e. Inflation differences.

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond=7.72% A = 9.64% BBB=10.18% AAA = 8.72% The differences in rates among these issues were most probably caused primarily by: O a. Maturity risk differences. O b. Tax effects. c. Default risk and liquidity differences. d. Real risk-free rate differences. e. Inflation differences.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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no Have All Questions been Answered? There are Three Parts to this problem (A, B, and C). Part A. From the following bond characteristics, list whether the bond was issued at a discount, premium, or par value. The market rate of interest is greater than the stated rate of interest Cash interest paid is less than the amount of interest expense The carrying value of the bond decreases over the life of the bond The amount of interest expense decreases over the life of the bond The present value of the bond cash flows equals the bond's face value The bond's carrying value is less than the bond's face value
Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields. A higher; lower B higher; higher C lower; lower D lower; higher
57. Which of the following statements is incorrect about bonds? In all ofthe statements, assume other things are held constant.a. Price sensitivity, that is, the change in price due to a given changein the required rate of return, increases as a bond’s maturityincreases.b. For a given bond of any maturity, a given percentage point increasein the interest rate (kd) causes a larger dollar capital loss thanthe capital gain stemming from an identical decrease in the interestrate.c. For any given maturity, a given percentage point increase in theinterest rate causes a smaller dollar capital loss than the capitalgain stemming from an identical decrease in the interest rate.d. From a borrower’s point of view, interest paid on bonds is taxdeductible.e. A 20-year zero coupon bond has less reinvestment rate risk than a 20-year coupon bond.
What is the biggest cause for the orange county failure? (100 words) Which of the following is false about the convexity of interest rate risk. Convexity demonstrates the nonlinear relationships between bond price and yield Convexity implies that bond prices and interest rates are inversely related Convexity implies a non-linear relationship between interest rates and bond prices. What is the duration of a zero-coupon bond with $100 face value and 3 years term to maturity? Fixed coupon bonds are not exposed to interest rate risk. Select one: True False The yield curve contributes to the interest rate spread between retail borrowing and lending. Select one: True False
Which of the following statements about Floating-Rate Debt is NOT true? A) Floating-rate debt has a stated interest rate that fluctuates in tandem with some interest rate benchmark (for instance, LIBOR). B)Floating-rate bonds allow companies to keep reported book value and fair value at the same level that protects investors from losses. C)The issuing company benefits from floating-rate debt when market interest rates increase. D)Floating-rate debt is issued at par.
Which of the following statements is right? Group of answer choices a)Ignoring the liquidity risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. b)Ignoring the default risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. c)The return of the 10-year treasury bond must be less than that of the 10-year corporate bond d)The return of the 10-year treasury bond must be greater than that of the 10-year corporate bond
(I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment. A. (I) is true, (II) false. B. (I) is false, (II) true. C. Both are true. D. Both are false.
Which of the following are short-term financial instruments? Select one: a. A banker's acceptance.b. A bond with five years maturity c.Share of Raysut cement d.None of these
Do solve all parts A. What risk premium do you use? Why? B. Why is the geometric mean lower than the arithmetic mean for both bonds and bills? C. If you had to use a risk premium with the longer periods, what biases will the investor have?
Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par? a. The rating agencies change the bond's rating from Baa to Aaa. b. Adding additional restrictive covenants that limit management's actions. c. Adding a sinking fund. d. Adding a call provision. e. Making the bond a first mortgage bond rather than a debenture.
23
Which of the following statements is/are CORRECT? O 1 Bonds sells well below par value when the yield to maturity is higher than its coupon rate. 2) Municipal bonds interests are tax-exempt at the federal level. 3) Most bonds are trading in the OTC market. O 4) All of the statements above are correct. 5) Statements a and c are correct.

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