Problem 1: Franklin Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bond non-callable. If the bond were made callable after 5 years with a 5% call premium, how would this affect the bond's required rate of return?
a. It is impossible to say without more information.
b. Because of the call premium, the required rate of return would decline.
c. There is no reason to expect a change in the required rate of return.
d. The required rate of return would decline because the bond would then be less risky to a bondholder.
e. The required rate of return would increase because the bond would then be more risky to a bondholder
Problem 2) Which of the following statements is CORRECT?
a. Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
b. Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
c. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate risk but less reinvestment rate risk.
d. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
e. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
Problem 3) Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
b. Adding more such stocks will reduce the portfolio's beta.
c. Adding more such stocks will increase the portfolio's expected return.
d. Adding more such stocks will reduce the portfolio's market risk.
e. Adding more such stocks will have no effect on the portfolio's risk.