How to calculate these finance problems?

[dallen47]

Question 1
Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?

1. Fixed assets are used as security for a bond.


2. A given bond is subordinated to other classes of debt.


3. The bond can be converted into the firm's common stock.


4. The bond has a sinking fund.


5. The bond has a call provision.


6. The indenture contains covenants that restrict the use of additional debt.



1, 3, 4, 5, 6
1, 2, 3, 4, 6
1, 4, 6
1, 3, 4, 6
1, 2, 3, 4, 5, 6



Question 2
If investors expect a zero rate of inflation, then the nominal rate of return on a very short-term U.S. Treasury bond should be equal to the real risk-free rate, r*.
True
False



Question 3
Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
True
False



Question 4
Koy Corporation's 5-year bonds yield 6.75%, 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?
0.71%
1.03%
0.66%
0.83%
0.85%



Question 5
The distributions of rates of return for Companies AA and BB are given below:

State of the Economy Probability of This State Occurring AA BB
Boom 0.2 30% -10%
Normal 0.6 10% 5%
Recession 0.2 -5% 50%

We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.
True
False



Question 6
If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value
A 10-year bond with a 12% coupon.
A 1-year zero coupon bond.
A 10-year bond with an 8% coupon.
A 1-year bond with an 8% coupon.
A 10-year zero coupon bond.



Question 7
The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
True
False



Question 8
Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.
True
False

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