To answer questions, assume “All else equal” 13. A municipal bond must have a yield to...

To answer questions, assume “All else equal”

13. A municipal bond must have a yield to maturity that is higher/lower/equal to the yield to maturity on a similar corporate bond.

14. An investment has a 3% rate which compounds quarterly, therefore it must have an EAR that higher than/lower than/equal to an investment that has a 1% rate which compounds monthly.

15. An investment has a 3% rate which compounds quarterly, therefore it must have an APR that higher than/lower than/equal to an investment that has a 1% rate which compounds monthly.

16. A stock that has a beta of 1.5 will have a risk premium that is higher than/lower than/equal to a stock that has a beta of 2.

17. A stock that has a beta of 1.5 will have a risk premium that is higher than/lower than/equal to the market risk premium.

18. A stock that has a growth rate of 4% must have a price that is higher than/lower than/equal to a stock that has a growth rate of 6%.

19. A stock that has a growth rate of 4% must have a price that is higher than/lower than/equal to a stock that is a perpetuity.

20. A bond that has a yield of 4% and a coupon rate of 5% must have price that is higher than/lower than a bond that has a yield of 5% and a coupon rate of 4%.

Solutions

Expert Solution

13. A municipal bond is backed by the government ans is therefore considered to be less risky. Therefore, the yield offered on the same as compared to a corporate bond would be less.

14. EAY (Quarterly) = 3.03%, EAY (Monthly) = 1.004%. Quarterly EAY would be higher.

15. APR of both would be the same. APR (Quarterly) = 3*4 = 12%, APR (Monthly) = 12*1 = 12%

16. The risk premium of the stock having beta 2 would be more as the systematic risk of that stock, as shown by beta, is more.

17. The risk premium of the stock will be more as the beta is 1.5 as compared to the beta of market which is 1.

18. The stock having growth rate of 6% will be priced higher as per the constant growth model.

19. The stock having the growth rate will be priced higher as all stocks are deemed to last till perpetuity.

20. The bond with coupon 5% will be priced at higher because not only does it have greater amounts of cash flows, these flows are also discounted at a lower rate.

ekkarill92 answered 11 months ago

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