Problem 1: Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity?
a) $1,046.59
b) $1,111.58
c) $1,133.40
d) $1,177.78
e) $1,189.04
Problem 2: Which of the following statements is NOT CORRECT?
a) If a bond is selling at its par value, its current yield equals its yield to maturity.
b) If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
c) All else equal, bonds with longer maturities have more interest rate (price) risk than do bonds with shorter maturities.
d) All else equal, bonds with larger coupons have greater interest rate (price) risk than do bonds with smaller coupons.
e) If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
Problem 3: Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of their annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following lists correctly ranks investments from highest to lowest returns and risk (thus, the highest risk security should be shown first, the lowest risk securities shown last)?
a) small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills
b) small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills
c) large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds
d) U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks
e) large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills
Problem 4: Apex Roofing's stock has a beta of 1.50, its required return is 14.00%, and the risk-free rate is 5.00%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.)
a) 10.50%
b) 11.00%
c) 11.50%
d) 12.00%
e) 12.50%