Question

In: Finance

question 1: Bond A is a municipal bond and Bond B is a corporate bond. Which...

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

Solutions

Expert Solution

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%

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