VSB 2009 Test 2 Questions & Answers
2024/2025
Taussig Corp.'s bonds currently sell for $920. They have a 6.35% annual coupon rate and a 20-year
maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call
premium would be incurred to call and refund the bonds, and also assume that the rates are expected to
remain at current levels on into the future. Under these conditions, what rate of return should an
investor expect to earn if he or she purchases these bonds? - ANSWERS7.11%
Cooley Company's stock has a beta of 1.28, the risk-free rate is 2.25%, and the market risk premium is
5.50%. What is the firm's required rate of return? Do not round your intermediate calculations. -
ANSWERS9.29%
O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal
annual, not semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price
of $875. What is the bond's nominal coupon interest rate? - ANSWERS7.96%
Mike Flannery holds the following portfolio:
Stock A - $150,000 Investment & 1.40 Beta
Stock B - $10,000 Investment & 0.80 Beta
Stock C - $140,000 Investment & 1.00 Beta
Stock D - $75,000 Investment & 1.20 Beta
What is the portfolio's beta? - ANSWERS1.19
Koy Corporation's 5-year bonds yield 8.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* =
3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP =
0.75% 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 default risk premium (DRP) on
Koy's bonds? - ANSWERS2.10%
, Nova Inc.'s manager believes that economic conditions during the next year will be strong, normal, or
weak, and she thinks that the firm's returns will have the probability distribution shown below. What's
the standard deviation of the estimated returns? Do not round your intermediate calculations.
30% Probability of Strong Economic Condition with a Return of 30.0%
40% Probability of Normal Economic Condition with a Return of 10.0%
30% Probability of Weak Economic Condition with a Return of -16.0% - ANSWERS17.88%
True or False:
A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms. -
ANSWERSFalse
Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of
$75, and a par value of $1,000. What is their current yield? - ANSWERS7.14%
True or False:
If an investor is considering buying a 10-year, $1,000 face value, noncallable bonds with a 7% annual
coupon and the yield to maturity is 8% is expected to remain constant for the next 10 years, then one
year from now, Bond A's price will be lower than it is today. - ANSWERSFalse
Nova Inc.'s bonds currently sell for $1,275. They pay a $90 annual coupon, have a 25-year maturity, and a
$1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call
premium would be incurred to call and refund the bonds, and also assume that the rates are expected to
remain at current levels on into the future. What is the difference between this bond's YTM and its YTC?
(Subtract the YTC from the YTM.) - ANSWERS2.92%
True or False:
A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot
be called, and is not expected to default. The bond should sell at a premium if market interest rates are
below 10% and at a discount if interest rates are greater than 10%. - ANSWERSTrue
