In: Finance
question 1: Bond A is a municipal bond and Bond B is a corporate bond. Which bond should have the higher yield to maturity?
QUESTION 2: Both A and B took out 30-year mortgages. A paid his off in 28 years. B paid hers off in 29 years. All else equal, who paid more interet? A OR B OR BOTH
Question 4
Stock |
Standard Deviation |
Beta |
A |
0.25 |
0.8 |
B |
0.15 |
1.1 |
Which stock has the greatest total risk?
A. |
B because it has the higher beta |
|
B. |
Not enough information to determine. |
|
C. |
A because it has the higher standard deviation |
QUESTION 6: Investment A has a quarterly interest rate of 4%. Investment B has a monthly interest rate of 1%. Which investment has the lower EAR? A OR B OR BOTH
1 | |||||||
Bond A is municipal bond which is subject to lower risk of default as compared to corporate bond. | |||||||
Corporate bond has higher risk and thus its return would be higher. | |||||||
Thus, corporate bond would have higher yield to maturity | |||||||
2 | |||||||
The faster the loan is repaid the lower is the total amount paid on loan and thus interest paid is lower | |||||||
A pays faster by one year as compared to B the loan amount and thus B would be paying higher interest | |||||||
Thus, B pays more interest on loan | |||||||
4 | |||||||
The total risk of security is denoted by its standard deviation. | |||||||
Standard deviation of Stock A is higher and thus it has greatest total risk | |||||||
Beta represents only the systematic risk and not total risk | |||||||
Thus, statement (c ) is correct | |||||||
6 | |||||||
EAR for investment A | (1.04^4)-1 | ||||||
EAR for investment A | 16.99% | ||||||
EAR for investment B | (1.01^12)-1 | ||||||
EAR for investment B | 12.68% | ||||||
Thus, EAR of investment B is lower of 12.68% | |||||||