Market with the same face value and some default risk

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Reference no: EM132020299

1. You bought today (2018 May 10) an 8% Treasury note issued on 2017 Jan 14 with due date 2025 Jan 14 has par value of $1,000 pays coupons every Jan 14 and July 14. Which of the following is(are) correct?

A You received the first coupon payment on 2017 Jan 14

B You will received $560 total coupon payments if you hold this note until maturity

C You bought this note at $1000

D You will receive $1085 on 2025 Jan 14

E None of the above.

2. Consider three bonds in the market with the same face value and some default risk. Bond A has 5 years until maturity with coupon rate 4%. Bond B has 10 years until maturity with coupon rate 2%. Bond C has 20 years until maturity with coupon rate 5%. Which of the following is correct?

A Bond A must have the highest interest rate risk.

B Bond B must have the highest interest rate risk.

C Bond C must have the highest interest rate risk.

D None of the above.

3. Bond Y and Z are identical except that Bond Y has a higher coupon rate than Bond Z. The current interest rate is 5%. Bond Y is sold below par. Which of the following(s) must be correct?

I Bond Y has a coupon rate higher than 5%

II Bond Y has a coupon rate lower than 5%

III Bond Z is sold below par

IV Bond Z is sold above par

A I only

B IIonly

C I and III only

D II and III only

E II and IV only

4. The price of all bonds in the market decline today. One possible reason is that the interest rates increase today. True/False?

5. Which of the following are correct?

I Interest is tax deductibe because it is considered on operating cost.

II A secured debt has higher risk than a debenture.

III A bond with higher default risk tends to pay higher coupon rate, all else equal.

IV Two bonds are identical except that one is subordinated and another one is a senior. If the subordinated bond is ranked B, the senior debt will not be ranked C.

A. I and II only

B I and IV only

C I, III and IV only

D II, III, IV only

E All of the above.

National Trucking has paid an annual dividend of $1.00 per share on its common stock for the past fifteen years and its expected to continue paying a dollar a share long into the future. Given this, one share of the firm’s stock is:

A basically worthless as it offers no growth potential.

B equal in value to the present value of $1 paid one year from today

C priced the same as a $1 perpetuity.

D valued at an assumed growth rate of one percent.

E worth $1 a share in the current market

Reference no: EM132020299

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