Question Details

Crockett Corporation's 5-year bonds yield 


1.	Assume that interest rates on 20-year Treasury and corporate bonds are as follows:

T-bond = 7.72%	AAA = 8.72%	A = 9.64%	BBB = 10.18%

The differences in these rates were probably caused primarily by:

a.	Tax effects.
b.	Default risk differences.
c.	Maturity risk differences.
d.	Inflation differences.
e. Real risk-free rate differences


2.	A bond trader observes the following information:

•	The Treasury yield curve is downward sloping.
•	Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
•	Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.

On the basis of this information, which of the following statements is most CORRECT?

a.	A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
b.	A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
c.	A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
d.	The corporate yield curve must be flat.
e.	Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.

3.	If the pure expectations theory of the term structure is correct, which of the following statements would be CORRECT?

a.	An upward sloping yield curve would imply that interest rates are expected to be lower in the future.
b.	If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now.
c.	The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
d.	Interest rate price risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds.
e.	Interest rate price risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds.

4.	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?

a.	1.90%
b.	2.09%
c.	2.30%
d.	2.53%
e.	2.78%
	

5.	Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 7.0%.  Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?

a.	7.36%
b.	7.75%
c.	8.16%
d.	8.59%
e.	9.04%
	6.	Crockett Corporation's 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%.  The real risk-free rate is r* = 3.60%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 0.90% 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 inflation premium (IP) is built into 5-year bond yields?

a.	0.68%
b.	0.75%
c.	0.83%
d.	0.91%
e.	1.00%
	

7.	Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.90%.  The real risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP = 0.40%, the liquidity premium on Kelly's bonds is LP = 2.2% versus zero on T-bonds, and the inflation premium (IP) is 1.5%.  What is the maturity risk premium (MRP) on all 5-year bonds?

a.	0.73%
b.	0.81%
c.	0.90%
d.	0.99%
e.	1.09%




Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help