Question

5. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

A. 1.08%

B. 1.20%

C. 1.32%

D. 1.45%

E. None of the above.

6. A company has two $1,000 face value bonds outstanding bond selling for $701.22. the first issue has an annual coupon of 8% and 20 years to maturity. The second bond has the same yield to maturity as the first bond but has only five years remaining until maturity. The second issue pays interest annually as well. What is the annual interest payment on the second issue?

A. $18.56.

B. $27.18.

C. greater than $30.00.

D. none of the above.

E. Cannot be determined.

7. Morin Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of $60. The market requires an interest rate of 8% on these bonds. What is the bond's price?

A. $865.80

B. $925.62

C. $948.76

D. $972.48

E. None of the above.

8. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?

A. 2.59%

B. 3.20%

C. 2.88%

D. 3.52%

E. None of the above.

Answer 1

Q5:

yield T bond= 5.3%

Corporate bond yield= 6.75%
Liquidity premium of corporate bond only= 0.25%

Default risk premium = corporate bond yield -T bond yield -Liquidity premium

=6.75-5.3-.25 =1.2%

Q6:

Data insufficient

Q7:

Price of bond = present value of coupon payments + present value of par value

= 60*[1-(1.08)^-10]/.08 + 1000/(1.08)^10 =865.8

Q8:

Treasury bond yield =real risk free rate+ inflation premium + maturity risk premium

5.5= 1.9 +.4 + real risk free rate

real risk free rate= 3.2%