11. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? _______

            a.         The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.

            b.         The discount rate decreases.

            c.         The riskiness of the investment's cash flows increases.

            d.         The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

            e.         The discount rate increases.

12. The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable future. However, inflation is expected to increase steadily over the next 30 years, so the Treasury yield curve has an upward slope. Assume that the pure expectations theory holds. You are also considering two corporate bonds, one with a 5-year maturity and one with a 10-year maturity. Both have the same default and liquidity risks. Given these assumptions, which of these statements is CORRECT?

            a.         Since the pure expectations theory holds, the 10-year corporate bond must have the same yield as the 5-year corporate bond.

            b.         Since the pure expectations theory holds, all 5-year Treasury bonds must have higher yields than all 10-year Treasury bonds.

            c.         Since the pure expectations theory holds, all 10-year corporate bonds must have the same yield as 10-year Treasury bonds.

            d.         The 10-year Treasury bond must have a higher yield than the 5-year corporate bond.

            e.         The 10-year corporate bond must have a higher yield than the 5-year corporate bond

13. 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.

14. Assuming the pure expectations theory is correct, which of the following statements is CORRECT?

a.

If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise.

b.

If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%.

c.

If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year.

d.

Reinvestment rate risk is higher on long-term bonds, and interest rate (price) risk is higher on short-term bonds.

e.

Interest rate (price) risk and reinvestment rate risk are relevant to investors in corporate bonds, but these concepts do not apply to Treasury bonds.

15. If the pure expectations theory holds, which of the following statements is CORRECT?

            a.         The yield curve for both Treasury and corporate bonds should be flat.

            b.         The yield curve for Treasury securities would be flat, but the yield curve for corporate securities might be downward sloping

            c.         The yield curve for Treasury securities cannot be downward sloping.

            d.         The maturity risk premium would be zero

            e.         If 2-year bonds yield more than 1-year bonds, an investor with a 2-year time horizon would almost certainly end up with more money if he or she bought 2-year bonds.

16. Which of the following statements is CORRECT?

            a.         The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond. 

            b.         The real risk-free rate is higher for corporate than for Treasury bonds.

            c.         Most evidence suggests that the maturity risk premium is zero.

            d.         Liquidity premiums are higher for Treasury than for corporate bonds.

            e.         The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.

17. Which of the following statements is CORRECT?

a.

The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds

b.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

c.

The pure expectations theory of the term structure states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and as a result, the yield curve is normally upward sloping

d.

If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

e.

Liquidity premiums are generally higher on Treasury than on corporate bonds.

18. Which of the following statements is CORRECT?

	a.	One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold
	b.	Long-term bonds have less price risk but more reinvestment risk than short-term bonds.
	c.	If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk.
	d.	Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk.
	e.	Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.

19. Which of the following statements is CORRECT?

            a.         All else equal, secured debt is more risky than unsecured debt.

            b.         The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero

            c.         All else equal, senior debt has more default risk than subordinated debt.

            d.         A company’s bond rating is affected by its financial ratios but not by provisions in its indenture.

            e.         Under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.

20. Nachman Industries just paid a dividend of D0 = $3.75. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value? ____

            a.         $144.04

            b.         $135.11

            c.         $127.47

            d.         $151.68

            e.         $130.01

Answer rating: 100% (QA)

11 B 12 E ... View the full answer