Exam 2

Practice Quiz 2-Answer Key

1. Use the following information for questions 1 and 2:

Real rate of interest 2.5% Annual expected inflation rate 3.0%
DRP (Investment grade) 1.0% DRP (junk) 2.75%
Liquidity risk premium 1.5%

What is the rate on a 1-year Treasury bill?

A. 2.5%
B. 5.5%-ANSWER
C. 6.5%
D. 8.75%

2. If the maturity risk premium is 10 basis points for each year beyond the first year, what is the 5-
year T-note rate?
A. 6.9%
B. 7.4%
C. 5.9%-ANSWER
D. 7.7%

3. Suppose a bond with a 10% coupon rate and semiannual coupons has a face value of $1000, 20
years to maturity and is selling for $1197.93. What is the yield to maturity?
A. 9%
B. 10%
C. 8%-ANSWER
D. 12%

4. Which of the following is not a factor that affects the level of interest rates?
A. Production opportunities
B. Risk
C. Corporate yield curves-ANSWER
D. Expected inflation

5. Six years ago, The Singleton Company sold a 20-year bond issue with a 14 percent annual
coupon rate and a 9 percent call premium. Today, Singleton called bonds. The bonds originally
were sold at their face value of $1000. Compute the realized rate of return for investors who
purchased the bonds when they were issued and who surrender them today in exchange for the
call price.
A. 14.32%
B. 16.21%
C. 14.87%
D. 15.03%-ANSWER

6. A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000, and a yield
to maturity of 10.5883 percent. The bond pays coupons semiannually. What is the bond’s
current yield?
A. 5.39%
B. 5.5%
C. 10.78%-ANSWER
D. 9.96%