Question

1. Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72%AAA = 8.72% A = 9.64% BBB = 10.18%. The differences in these rates were probably caused primarily by:

A.

Tax effects.

B.

Inflation differences.

C.

Default and liquidity risk differences.

D.

Maturity risk differences.

QUESTION 2

1. The Federal Reserve tends to take actions to ______ interest rates when the economy is very strong and to ______ rates when the economy is weak.

A.

Increase; increase.

B.

Increase; decrease.

C.

Decrease; decrease.

D.

Decrease; increase.

QUESTION 3

1. he "yield curve" shows the relationship between______

A.

Long-term debt values and their correlations to equity prices.

B.

Bonds' maturities and their yields

C.

The price of options (call and put) that will be expired after one year or more.

D.

Equity prices and their risk.

QUESTION 4

1. The 10-year treasury bond has_____ price sensitively and_____ reinvestment risk than the 25-year treasury bond.

A.

Higher; higher.

B.

Lower; lower.

C.

Higher; lower.

D.

Lower; higher.

QUESTION 5

1. What is the value of a 10-year bond outstanding with 11% annual required rate and 11% annual payment?

A.

$760.06

B.

$1000

C.

$852.80

D.

$1097.19

Answer 1

1]

The answer is C. Treasury bonds are risk-free and much more liquid. Hence corporate bonds have higher yields as they are more risky and less liquid

Maturity is incorrect as all the bonds in the question are 20-year bonds

Inflation in the economy is the same, irrespective of which bond is being evaluated

2]

The answer is B. When the economy is very strong, there is a risk of inflation and overheating of the economy. Hence the Fed would tend to raise interest rates to decrease money supply and reduce inflation. When the economy is weak, the Fed would tend to lower interest rates to stimulate lending and stimulate investment with a view to boost the economy.

3]

The answer is B. The yield curve is a graph with maturities of bonds on the X-axis and yields on the Y-axis. It shows the relationship between bonds of different maturities and their yields.

4]

The answer is B. Bonds with shorter maturities are less sensitive to interest rates than bonds with longer maturities. This is because of their lower time horizon, which means less uncertainty for the investor. Bonds with longer maturities have more reinvestment risk, as the investor is exposed to the risk of reinvesting the coupon payments at lower rates (in case of a decline in overall interest rates)