Question

81. Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 7.00%, how much is the bond worth today?

            a.         $1,807.18

            b.         $2,287.57

            c.         $2,630.71

            d.         $1,921.56

            e.         $2,562.08

82. Suppose the U.S. Treasury offers to sell you a bond for $687.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

            a.         6.00%

            b.         8.96%

            c.         7.24%

            d.         6.39%

            e.         7.79%

83. Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $4,100. What interest rate would you earn if you bought this bond at the offer price?

            a.         2.38%

            b.         3.55%

            c.         3.17%

            d.         3.20%

            e.         3.27%

84. Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $5.00. What was the growth rate in earnings per share (EPS) over the 10-year period?

            a.         19.42%

            b.         21.75%

            c.         25.89%

            d.         32.11%

            e.         29.78%

85. Five years ago, Red Go Inc. earned $2.70 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

            a.         3.46%

            b.         4.11%

            c.         2.73%

            d.         3.08%

            e.         3.53%

86. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

            a.         8.38%

            b.         9.79%

            c.         8.80%

            d.         8.30%

            e.         9.38%

87. Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 7.00%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

            a.         9.50%

            b.         11.59%

            c.         7.70%

            d.         7.41%

            e.         8.46%

88. The real risk-free rate is 3.05%, inflation is expected to be 3.60% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond?

            a.         8.18%

            b.         6.65%

            c.         5.72%

            d.         5.32%

            e.         5.52%

89. Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 5.90%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

            a.         9.27%

            b.         8.91%

            c.         7.29%

            d.         9.00%

            e.         10.35%

90. Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 2.50%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

            a.         7.67%

            b.         7.10%

            c.         7.53%

            d.         6.96%

            e.         5.40%

Answer 1

Answer to Question 81:

Future Value = $4,500
Time Period = 10 years
Interest Rate = 7.00%

Present Value = Future Value / (1 + Interest Rate)^Time Period
Present Value = $4,500 / 1.07^10
Present Value = $2,287.57

Answer to Question 82:

Current Price = $687.25
Maturity Value = $1,000
Time to Maturity = 5 years

Current Price = Maturity Value / (1 + Interest Rate)^Time Period
$687.25 = $1,000 / (1 + Interest Rate)^5
(1 + Interest Rate)^5 = 1.455075
1 + Interest Rate = 1.0779
Interest Rate = 0.0779 or 7.79%

Answer to Question 83:

Current Price = $3,000
Maturity Value = $4,100
Time to Maturity = 10 years

Current Price = Maturity Value / (1 + Interest Rate)^Time Period
$3,000 = $4,100 / (1 + Interest Rate)^10
(1 + Interest Rate)^10 = 1.366667
1 + Interest Rate = 1.0317
Interest Rate = 0.0317 or 3.17%

Answer to Question 84:

EPS, today = $5.00
EPS, 10 years ago = $0.50

Growth Rate = (EPS, today / EPS, 10 years ago)^(1/10) - 1
Growth Rate = ($5.00 / $0.50)^(1/10) - 1
Growth Rate = 10^(1/10) - 1
Growth Rate = 1.2589 - 1
Growth Rate = 0.2589 or 25.89%