Suppose your portfolio is all equity. If you add some bonds, at first Under norm

Question

Suppose your portfolio is all equity. If you add some bonds, at first

Under normal economic conditions, the major source of risk faced by investors who purchase investment grade bonds is interest rate risk, while In a severe recession, the major source of risk faced by investors who purchase corporate bonds is default risk. True or False?

Martin is trying to decide which one of the bonds in the attachment he should purchase. All the bonds have the same maturity date and all have approximately the same level of risk. The general level of interest rates is declining. Martin is in the 33 percent federal income tax bracket and the 6 percent state income tax bracket. The municipal bonds are from his home state. Which bond should Martin purchase if he wishes to hold it for the long term?

Bond A: Corporate, 7.2% Callable
Bond B: Corporate, 7% non-callable
Bond C: Municipal, 4.75%, non-callable
Bond D: Municipal, 4.77% callable

Littleton Co. issued $1,000 par value bonds with a 6% coupon rate, convertible into 25 share of Littleton common stock. When the bonds were issued the stock traded at $25 per share. The stock is now at $42 per share and pays a $0.10 per share annual dividend. In the near future

D. Both the issuing company and the bondholders will wait for the bonds to reach their maturity date.

Zembala Co. bonds are currently A rated. The rating co. reevaluates the company and changes the rating to AA

Which of the following statements concerning the current yield is correct?

Martinez bought a bond with an 8% coupon rate for $1,100 and sold it one year later for $1,150. His holding period return was

D. 13.0%.

Ryan Hornback owns the 3 bonds shown in the attachment. What is the duration of Ryan's portfolio?

Bond X: 5,000 (Amount Invested), 8.6 years (bond Duration)
Bond Y: 4,000, 4.2 years
Bond Z: 1,000, 11.4 Years

D. 11.4 years

The Attachment shows performance data for the Vanguard Explorer Fund. Calculate the Explorer Fund's holding period return.

NAV: 12.80 (beginning of year), 11.64 (End of year)
Market Price of fund shares: 13.05 (begining), 9.95 (end)
Dividends paid over the year: .90 (end)
Capital Gains distributed over the year: .30 (end)

A. the level of risk of the portfolio is impacted more than the rate of return. B. the rate of return on the portfolio is impacted more than the level of risk. C. the evel of risk and the rate of return are equally impacted. D. the rate of return is not impacted but the level of risk is lowered.

Explanation / Answer

1) A

2) True

3) B

4) C

5) D

6) A

7) Holding period return = $80 + ($1,150- $1,100) / $1,100 = 0.118 or 11.8%

8) 8.07yrs

9) Holding period return = $0.90+$0.30 + ($9.95- $13.05) / $13.05 = -0.146 or 14.6%

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