QUESTION 1
1. Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition,
we could be sure that
a.
The economy is not in a recession.
b.
Maturity risk premiums could help to explain the yield curve’s upward slope.
c.
Long-term bonds are a better buy than short-term bonds.
d.
Long-term interest rates are more volatile than short-term rates.
e.
Inflation is expected to decline in the future.
0.25 points
QUESTION 2
1. Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-
callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how
would this affect their required rate of return?
a.
Because of the call premium, the required rate of return would decline.
b.
It is impossible to say without more information.
c.
The required rate of return would increase because the bond would then be more risky to a
bondholder.
d.
There is no reason to expect a change in the required rate of return.
e.
The required rate of return would decline because the bond would then be less risky to a
a.
3.92%
b.
4.76%
c.
3.04%
d.
4.00%
e.
4.60%
a.
$1,024.74
$1,147.71
