23. David Cone is concerned about the interest rate changes

23. David Cone is concerned about the interest rate changes for his fixed income investment. He looked at the treasury yield curve on Wall Street Journal and observed a normal yield curve. Based on this observation, which of the following statements is correct?

a. Companies must have more investment opportunities now than they expected to have in the future

b. Future short-term interest rates are expected to be higher than current short-term interest rates assuming the pure expectation theory holds.

c. Maturity risk premium is positive

d. Inflation must be expected to increase in the future

e. Expectation theory must be correct

24. A bond trader observes the following information:

· The Treasury yield curve is downward sloping.

· Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.

· Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.

On the basis of this information, which of the following statements is most CORRECT?

a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.

b. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.

c. 5-year corporate bond must have a higher yield than a 10-year Treasury bond.

d. The corporate yield curve must be flat.

e. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.

25. If the current one year CD rate is 5% and the best estimate of one year CD which will be available one year from today is 7%, what is the current two year CD rate with 1% liquidity premium?

a. 5.0%

b. 5.5%

c. 6.0%

d. 6.5%

e. 7.0%

26. In July 2009, Hungary successfully issued 1 billion euros in bonds. The transaction was managed by Citigroup. Who is the issuer and what is the category of bonds issued?

a. Citigroup, Corporate bonds

b. The bank of Budapest, Municipal bonds

c. The Hungarian government, Foreign government bonds

d. The New York Citibank, Sinking bonds

e. The Hungarian government, T-bonds

27. Roen is planning to invest in five-year 15% annual coupon bonds with a face value of $1,000 each. Calculate number to fill the blanks in the table and identify which one is the premium bond if the market is at equilibrium.

Bond	Discount Rate	Bond Value	Current Yield
Bond A	(1)	$1,189.54	12.61%
Bond B	15.00%	(2)	15.00%
Bond C	16.40%	$954.58	(3)

a. 9.00%, $988.76, 14.47%, bond A

b. 10.00%, $1,000.00, 15.71%, bond A

c. 11.00%, $1,100.00, 15.92%, bond B

d. 12.24%, $1,000.00, 16.00%, bond B

e. 10.00%, $1,250.00, 16.12%, bond C

28. Assume that a $1 million par value, semiannual coupon U.S. Treasury note with five years to maturity has a coupon rate of 6%. The YTM of the bond is 11.00%. What is the value of the T-note?

a. $511,282.39

b. $689,825.45

c. $973,871.22

d. $811,559.35

e. $987,654.32

29. Duff Brewing Co. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000 and their current market price is $1,190.35. However, Duff Brewing Co. may call the bonds in 8 years at a call price of $1,060. What are the YTM and YTC, respectively? Also, if Duff Brewing Co. issues new bonds today, what coupon rate must the bonds to be issued at par?

YTM YTC Coupon Rate

a. 6.09%, 5.47%, 6.09%

b. 7.09%, 6.47%, 7.09%

c. 8.09%, 7.47%, 7.47%

d. 8.92%, 8.82%, 8.82%

e. 9.23%, 9.32%, 9.32%

.

30. The following bond list is from the business section of a newspaper on January 1, 2005 (all are semi-annual bonds). Prices are stated relative to the par value of $100. Calculate what number should be in the blank and indicate which bond is not trading at discount.

Company	Coupon	Maturity	Last Price	Last Yield	EST Spread	UST (Years)	EST Volume (1000s)
Schubert, Inc.	8.125%	01-01-2015	$82.25	11.11%	6.20	10	72,070
Chapman, Inc.	9.625%	01-01-2035	$80.48	12.05%	7.15	30	65,275
Rust, Inc.	4.500%	01-01-2010		5.62%	1.37	5	59,277
Murphy & Co.	5.375%	01-01-2010	$101.02	5.14%	0.89	5	57,465
Pickman, Inc.	7.750%	01-01- 2015	$93.11	8.80%	3.89	10	56,305

Last Price & Last Yield: bond’s price and YTM at the end of trading.

EST Spread: bond’s spread above the relevant U.S. Treasury benchmark (percentage).

UST: relevant maturity of U.S. Treasury benchmark for each bond.

EST Volume: # of bonds traded during the day.

a. $88.27, Rust, Inc.

b. $95.23, Murhpy & Co.

c. $95.18, Murhpy & Co.

d. $100.40, Pickman, Inc.

e. $102.80, Schubert, Inc.