Question

A junk bond with a face value of $115 and a beta of 0.6 will default with 30% probability. If it does, investors receive only 50% of what is due to them. The risk-free rate is 3.4% per year and the market risk premium is 8.2% per year. What is the promised rate of return of this bond?

Select one:

a. Promised return 29.44

b. Promised return 31.44

c. Promised return 27.44

d. Promised return 25.44

Answer #1

T/F
a. The one-year default rate on junk bonds reached double-digits
in 1991 and has never since exceeded even 4%. ____
b. The one-year default rate on investment-grade debt averages
about 2%. _____
c. Most defaults occur in recessions when investment-grade firms
experience a large drop in revenue._____
d. A bank that buys the CDX North America contract can reduce
its transactions costs relative to buying protection on all 125
single reference names.___
e. The typical spread on a junk...

The face value of the bond is paid at the maturity of the
bond.
True
False
Which of the following is used as a discount rate while
calculating the bond price?
Yield to Maturity (YTM)
Coupon Rate
Face Value
None
Coupon payments are determined by multiplying face value of the
bond with the coupon rate.
True
False
Which of the following explains the differences in interest
rates?
The length of the investment (maturity premium).
The level of risk of the...

1. The face value of the bond is paid at the maturity of the
bond. True or false?
2. Which of the following is used as a discount rate while
calculating the bond price?
Yield to Maturity (YTM)
Coupon Rate
Face Value
None
3. Coupon payments are determined by multiplying face value of
the bond with the coupon rate. True or false?
4. Which of the following explains the differences in interest
rates?
The length of the investment (maturity premium)....

The estimated beta for RDG is 0.74. The risk free rate of
return is 4 percent and the Equity Risk Rremium is 5 percent. What
is the required rate of return for RDG using the CAPM?
15.2%
12.3%
10.1%
7.7%
MDX has a current beta of 6. The market risk premium is 7
percent and the risk-free rate of return is 3 percent. By how much
will the cost of equity increase if the company expands their
operations such that...

A zero-coupon bond has a beta of 0.3 and promises to pay $1000
next year with a probability of 95%. If the bond defaults, it will
pay nothing. One -year Treasury securities are yielding 2%, and the
equity premium is 5%. What is the promised rate of return on this
bond? Round your answer to the nearest tenth of a percent. 6.9%
8.0% 8.2% 8.9%

A bond will payoff $2000 with a probability of 80% and will pay
off only $500 with a probability of 20% next year. The risk-free
rate of return is 3%. What is the appropriate promised yield
(return) on this bond?
Select one:
a. Promised return = 1.18%
b. Promised return = 31.18%
c. Promised return = 11.18%
d. Promised return = 21.18%

Suppose you purchase 5-year annual coupon bond in the primary
market. The face value of the bond is $1000. The current risk-free
interest rate is 2%. The bond belongs to an asset class
appropriated a 3% risk premium.
a) After a year has passed, you collect your coupon payment. At
that point, a new investment becomes available to you and you
decide to sell your bond in the secondary market. By the time of
the sale, the economic outlook has...

Suppose you purchase 5-year annual coupon bond in the primary
market. The face value of the bond is $10,000. The current
risk-adjusted interest rate is 2% bond belongs to an asset class
appropriated a 3% risk premium.
a) After a year has passed, you collect your coupon payment. At
that point, a new investment becomes available to you and you
decide to sell your bond in the secondary market. By the time of
the sale, the economic outlook has improved...

Michael Jordan purchased a 3-year bond with the face
value of 20,000 in the primary market. The current risk-free
interest rate was
0.25%, and a risk premium on that bond is 3%. A year later after
collecting his
yearly coupon payment, Mr. Jordan decided to sell that bond in the
secondary market.
By that time, the economic situation has improved, and the
risk-free interest rate
has risen to 1%. What is Mr. Jordan's rate of return for the
one-year period...

Stock D has a beta value of 3.4. It pays annual dividends, of
$90, starting one year from today. If the risk-free return is
currently .5%, and the equity risk premium is 6%, what is the
present value of the stock?
Select one:
a. 430.6
b. 441.17
c. 18,000
d. 354.3
e. 1,384.6

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