Question 14 Which of the following statements is NOT CORRECT ? Answers All else

Question

Question 14

Which of the following statements is NOT CORRECT?

Answers

All else equal, secured debt is less risky than unsecured debt.

The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.

All else equal, senior debt has less default risk than subordinated debt.

A company's bond rating is affected by its financial ratios and provisions in its indenture.

Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.

Question 15

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

Answers

6.39%

6.72%

7.08%

7.45%

7.82%

Question 16

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Answers

7.39%

7.76%

8.15%

8.56%

8.98%

Question 17

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Answers

$891.00

$913.27

$936.10

$959.51

$983.49

Question 18

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Answers

1.90%

2.09%

2.30%

2.53%

2.78%

Question 19

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*?

Answers

2.59%

2.88%

3.20%

3.52%

3.87%

Question 20

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?

Answers

0.49%

0.55%

0.61%

0.68%

0.75%

Which of the following statements is NOT CORRECT?

Answers

All else equal, secured debt is less risky than unsecured debt.

The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.

All else equal, senior debt has less default risk than subordinated debt.

A company's bond rating is affected by its financial ratios and provisions in its indenture.

Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.

Explanation / Answer

All else equal, senior debt has less default risk than subordinated debt.

15)

Caliculate using Ms- Exal

Number of period    Nper    15

PMT cupan payment = -95

Current market PV = 1165

Par value or face FV -1000

                                   …………….

                                    7.62%

So option e is correct

16)

Calculate using Ms- Exal

Number of period    Nper    5

PMT Copan payment = -135

Current market PV = 1280

Par value or face FV -1050

                              ----------------

                                 7.45%

So option d is correct

17)

Using a Financial Calculator:
PV=?
N=15*2=30 periods
PMT= .095/2=.0475*1000= $47.5
I=11/2 =5.5

Present Value of the Bond comes out to $890.997 (round off to $891.00). you multiply the 15 year maturity by two because it is semi-annual and the PMT you divide the coupon rate by 2 and multiply by the par value to find the semi annual payment.

So the option a is correct

18)

K            =          required return (or) yield on debt security

K           = real risk-free rate of interest

IP         =          Inflation premium

DRP    =          default risk premium

LP        =          liquidity premium

MRP   = maturity risk premium

Formula is

K=K*+IP+DRP+LP+MRP

T-bonds have a yield of 6.2%

Corporate bond yield 8.5%

Risk premium on all 10-year bonds = 13%

Liquidity risk Permian 0.4%

8.5 = 6.2%+DRP+0.4%+1.3

8.5 = 7.9%+DRP

8.5-7.9 = DRP

DRP () default risk premium = 6.25

19)

yield on T-bond, r(m) = r(f) + IP +r(p)
where,
r(m) = yield = 5.5 %
r(f) = risk free rate
IP = inflation premium = 1.9 %
r(p) = maturity risk premium = 0.4 %
Hence, 5.5 = r(f) + 1.9 + 0.4 = r(f) + 2.3
=> r(f) = 5.5 - 2.3 = 3.2 %

So option C is correct 3.2

20) Option (e) 0.75 is correct option

All else equal, senior debt has less default risk than subordinated debt.

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