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FIN 3826 : Investments Exam 2 Outline

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azuremammoth471
15 Mar 2019
School
LSU
Department
Finance
Course
FIN 3826
Professor
All

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Document Summary

Assume the rates are effective annual rates: a bond rating company ran into trouble when it began rating bonds of companies without their approval. Many of the companies that received the free" credit ratings were upset by this practice. Why would a company be upset about this: most college endowment funds are tax-exempt. Why or why not: on a treasury bond quote, the ask yield is stated but the bid yield is not. Is the bid yield higher or lower than the ask yield: evaluate this claim: treasury bonds have no risk , at what tax rate would an investor be indifferent between a municipal bond yielding. Why is the psa important in determining the value of a. What about mortgage borrowers (homeowners): a ,000 face value strips is currently quoted at 38. 642 and has 11 years to maturity. What is the yield-to-maturity: josh is saving money to purchase a home in 9 years.

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Related Questions

Multiple Choice Quiz
PLS EXPLAIN ALL YOUR ANSWERS
1
If a bond's rating improves:
A) It should cause the bond's price and yield to increase, allother factors constant.
B) It should cause the bond's price and yield to decrease, allother factors constant.
C) It should cause the bond's price to increase and its yield todecrease, all other factors constant.
D) None of the above.



2
An investor earning 6% from a tax-exempt bond, who is in a 25% taxbracket, holding risk constant:
A) Would be indifferent to a taxable bond with a 7.5% yield.
B) Would be indifferent to a taxable bond with a 8.0% yield.
C) Would be indifferent to a taxable bond with a 4.5% yield.
D) None of the above.



3
When the yield curve is downward sloping:
A) People are expecting an economic slowdown.
B) Short term yields are lower than long term yields.
C) This is impossible, since the yield curve always slopesupward.
D) People could be expecting a loosening in monetary policy.



4
Assume the Expectation Hypothesis regarding the term structure ofinterest rates. If the current one-year interest rate is 4% and thecurrent two-year interest rate is 6%, then:
A) Investors are expecting the future one-year rate to be 4%.
B) Investors are expecting the future one-year rate to be 8%.
C) Investors are expecting the future one-year rate to be 6%.
D) None of the above.



5
Which of the following statements is(are) true?
A) Conforming mortgages are mortgages for which the borrowers donot meet standards of creditworthiness.
B) Subprime mortgages are often made to individuals with low creditscores or income levels that are relatively low when compared tothe price of the home.
C) Subprime mortgages are never used in mortgage backed securitiesbecause of their riskiness.
D) All of the above.



6
Assume an investor has a choice of 3 consecutive one-year bonds orone 3-year bond. Assuming the Expectations Hypothesis of the termstructure of interest rates:
A) The average interest rate of the three consecutive one-yearbonds should be less than the 3-year bond to reflect the riskpremium.
B) The interest rate of the 3-year bond should equal the averageinterest rate of the 3 one-year bonds.
C) The three consecutive one-year bonds must have the same interestrate.
D) The current one-year interest rate must equal the current 3-yearinterest rate.



7
We would expect the risk spread between Baa bonds and U.S. Treasurysecurities of the same maturities to:
A) Widen during periods of economic recession.
B) To remain relatively constant over the business cycle.
C) To decrease during economic slowdowns.
D) To increase during economic growth periods.



8
Increased borrowing by the U.S. Treasury to finance growing budgetdeficits will:
A) Result in U.S. Treasury yields being higher than high gradecorporate bonds.
B) Result in the price of U.S. Treasury bonds rising.
C) Cause the yield on U.S. Treasury bonds to increase, but still belower than corporate bonds.
D) Result in lower yields on corporate bonds.



9
Imagine a scandal that finds the officers of bond rating agencieshave been taking bribes to inflate the rating of specific bonds.This should:
A) Have no impact on the bond market since bond markets are highlyefficient.
B) Decrease the demand for all bonds.
C) Increase the demand for U.S. Treasury securities and decreasethe demand for corporate bonds.
D) Decrease the risk spread.



10
A proposed increase in the federal income tax rates may actually beviewed favorably by many mayors of cities because:
A) It will allow them to also raise their tax rates.
B) It will cause the demand for Municipal bonds to increase andtheir yields to increase.
C) People will pay less attention to local taxes.
D) It will cause the price of municipal bonds to increase and theiryields to decrease.



11
Bonds rated as "highly speculative":
A) Are rated so because they guarantee high returns for thebuyer.
B) Are commonly referred to as junk bonds.
C) Are ranked just below investment grade by Standard &Poor's.
D) Are rated so because they do not have any default risk.



12
Ratings problems contributed to the financial crisis of 2007-2009because:
A) Ratings agencies sharply downgraded the ratings of MBS ashousing prices declined, reinforcing the decline in the prices ofMBS.
B) MBS issuers consulted ratings agencies to structure MBS to getthe highest ratings, causing a conflict of interest.
C) Ratings agencies were compensated by the issuers of the MBS,causing the incentive for favorable ratings.
D) All of the above.



13
An investor in a 30% marginal tax bracket, earning $10 in interestannually for a $100 U.S. Treasury bond:
A) Earns a 10% after-tax return because interest on U.S. Treasurybonds is tax exempt at the federal level.
B) Earns a 3% return after-tax.
C) Would be indifferent between this bond and a municipal bondoffering $7 annually per $100 of face value, assuming the samedefault risk.
D) Earns a 1% return after-tax.



14
Commercial paper refers to:
A) The financial publications read by the CEO's of publiccorporations.
B) Any debt security with a maturity exceeding one year.
C) Short-term collateralized securities issued only bycorporations.
D) Unsecured short-term debt issued by corporations andgovernments.



15
The addition of the Liquidity Premium Theory to the ExpectationsHypothesis allows us to explain why:
A) Yield curves usually slope upward.
B) Interest rates on bonds of different maturities movetogether.
C) Long-term interest rates are less volatile than short terminterest rates.
D) Yield curves are flat.


Venture Corp issued 7 year 5% bonds due 2024 at par. This bond pays interest on a semi-annual basis. However, right after Venture issued the bonds, the Company seriously missed its first earnings and at the same time, the interest rate environment changed. Now the market’s required return has increased to 10% (all else being equal). In this current environment, what is the trading price of the bond? Is this bond trading at a discount or premium?

Now suppose you find out that the Venture Corp bonds are callable in 3 years at 103% (or $1030). Assuming the trading price you found above, what is the bond’s yield to call? Is the yield to call or yield to maturity higher? Why? (Hint: the yield to call is the yield you get if you hold the bond until the call date and redeem the call price)

Venture Corp issued 7 year 5% bonds due 2023 at par. This bond pays interest on a semi-annual basis. However, right after Venture issued the bonds, the Company missed its first earnings and at the same time, the interest rate environment changed. Now the market’s required return has increased to 9% (all else being equal). In this current environment, what is the trading price of the bond? Is this bond trading at a discount or premium? (5 points) Now suppose you find out that the Venture Corp bonds are callable in 3 years at 101% (or $1010). Assuming the trading price you found above, what is the bond’s yield to call? Is the yield to call or yield to maturity higher? Why? (Hint: the yield to call is the yield you get if you hold the bond until the call date and you get paid the call price ) (5 points) Venture Corp is considering two identical 7year bonds except one had a call and the other was noncall. Which one should be more expensive( higher yield) to issue for Venture Corp and why? (Hint think about the motivation for exercising the call and its impact on bondholders) (5 points)