Question 1

Which one of the following statements is not correct?

Accepted Answer

Large, well-established companies typically have investment-grade ratings, not speculative grade ratings. Speculative grade ratings are often given to smaller, more risky companies or those with weaker financials.

Question 2

The risk premium of a company would increase with:

Accepted Answer

An increase in the debt to equity ratio would increase the level of financial risk for a company, as they are taking on more debt compared to equity. This would increase the risk premium, which is the additional return required by investors to compensate for higher risk.

Question 3

Which of the following rated bonds has the least risk?

Accepted Answer

AAA rated bonds have the least risk as they are the highest rated bonds indicating low default risk.

Question 4

Debt ratings assigned by professional debt-rating services are a measure of the bond issuers'

Accepted Answer

Debt ratings assigned by professional debt-rating services are a measure of the bond issuers' default risk.

Question 5

Which one of the following ratios is the most correlated to default risk?

Accepted Answer

The debt to equity ratio is the most correlated to default risk because it shows the extent to which a company is relying on debt to finance its operations. A high debt to equity ratio indicates that a company has higher financial leverage and is more vulnerable to default. The other ratios listed are not directly related to a company's ability to repay its debts and therefore, are not as closely correlated to default risk.

Question 6

Which of the following risks may be included in the spread that compensates corporate bond investors for the assumption of additional risks over domestic government bond investors?

Accepted Answer

The answer of Which of the following risks may be...

Question 7

Which one of the following is not true?

Accepted Answer

Inflation does affect the interest rates of bonds. Inflation increases the risk of holding bonds, leading to higher interest rates to compensate investors for this additional risk.

Question 8

Suppose you observed that five-year government bonds are trading at a YTM of 5.75 percent.The yield spread between AAA- and BBB-rated corporate bonds is 130 basis points.The maturity yield differential between the three-year and five-year government bonds is 45 basis points.What yield would you expect to observe on BBB-rated corporate bonds with three years to mature?

Accepted Answer

Kb = RF +/- maturity yield differential + yield spread = 6.60% = 5.75% - 0.45% + 1.30%

Question 9

Which of the following is not a theory of the term structure of interest rates?

Accepted Answer

Interest rate parity theory is not a theory of the term structure of interest rates. It is a theory that explains the relationship between exchange rates, interest rates, and inflation rates. The other three choices (Expectations theory, Liquidity preference theory, and Market segmentation theory) are all theories that help explain the term structure of interest rates.

Question 10

Suppose U.S.interest rates are presently 4.54 percent on one-year U.S.T-bills.Suppose that the one-year forward exchange rate is quoted at US$1 = C$1.0698 and that the interest rate on one-year T-bills in Canada is 4.325 percent.What should the spot exchange rate be?

Accepted Answer

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Question 11

A ten-year zero coupon bond with a face value of $1,000 is currently quoted at 48.72.Assume the bond's YTM remains unchanged throughout the bond's term to maturity.What should the bond be sold for three years from now?

Accepted Answer

Compute semi-annual yield,11ea8229_349a_5123_bbd8_0700df3a99a7_TB1726_00 Compute 11ea8229_349a_7834_bbd8_b5d6906b7c61_TB1726_00

Question 12

A twenty-year zero coupon bond with a face value of $1,000 is currently selling for $326.50.What is the bond's YTM?

Accepted Answer

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Question 13

A 182-day Canadian T-bill has a bond equivalent yield of 3.925 percent.What is the bank discount yield on a 182-day U.S.T-bill with the same quoted price?

Accepted Answer

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Question 14

Suppose you observed that one-year T-bills are trading at a YTM of 4.35 percent.The yield spread between AAA- and BBB-rated corporate bonds is 150 basis points.The maturity yield differential between the one-year T-bills and the five-year government bonds is 65 basis points.What yield would you expect to observe on BBB-rated corporate bonds with a five-year maturity?

Accepted Answer

Kb = RF +/- maturity yield differential + yield spread = 6.50% = 4.35% + 0.65% + 1.50%

Question 15

Suppose Canadian interest rates are presently 4.5 percent on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9 percent.What should the one-year forward exchange rate (C$/US$)be?

Accepted Answer

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Question 16

A 180-day U.S.T-bill has a bond discount yield of 4.135 percent.What is the bank equivalent yield on a 180-day Canadian T-bill with the same quoted price?

Accepted Answer

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Question 17

What is the yield of a 91-day Canadian T-bill with a par value of $1,000 that is quoted at 98.735?

Accepted Answer

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Question 18

A zero coupon bond with a face value of $1,000 is currently selling for $687.38.The bond has a market yield of 5.48 percent.What is the bond's term to maturity?

Accepted Answer

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Question 19

Marie bought a five-year 4.25 percent annual coupon bond for $974 a year ago.Today,she sold the bond at the market yield of 4 percent.What is Marie's approximate real rate of return if the inflation rate over the past year was 2.2 percent?

Accepted Answer

Compute bond price: N=4,I/Y=4,PMT=$42.50,FV=$1,000 F1S1S1W1F1F1F10 PV = -$1,009.07.Nominal return = (42.5 + 1009.07 -974)/(974)= 7.96%.Approximate real rate = 7.96% - 2.2% = 5.76%.

Question 20

Suppose you buy 91-day Treasury bill with a par value of $1,000 for 98.125 at the time of the issue.After owning the Treasury bill for 23 days,you sell it.The bond equivalent yield you earned is 6.57%.What price did you receive for the T-bill?

Accepted Answer

F1S1S1W1F1F1F10Selling price = $985.31

Quiz 6: Bond Valuation and Interest Rates