test1 - FIN 4243 Practice Midterm Fall 2009 Solution Part I...

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1 FIN 4243 Practice Midterm Fall 2009 Solution Part I. Multiple Choice (Total 50 pts or 2 pts each) 1. The current price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond price changes by 2.50. What is the duration of the bond? A. 5.00 B. 2.44 C. 4.88 D. 2.50 Answer: C 2. Which of the following statements about reinvestment risk of a security is least accurate? Reinvestment risk: 3. The duration of a bond is 5.47, and its current price is $986.30. Which of the following is the best estimate of the bond price change if interest rates increase by 2%? 4. An investor is concerned about interest rate risk. Which of the following four bonds (similar except for yield and maturity) has the least interest rate risk? The bond with:
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2 5. Assume the following yields for different bonds issued by a corporation: 1-year bond: 5.50% 2-year bond: 6.00% 3-year bond: 7.00% If a 3-year U.S. Treasury is yielding 5%, then what is the absolute yield spread on a 3-year corporate issue? A. 0.40 B. 1.40 C. 100bp D. 200bp Answer: D 6. For two bonds that are alike in all respects except credit risk, the yield ratio is 1.0833. If the yield on the higher yield bond is 6.5%, the lower yield bond yield is closest to: 7. Which of the following most accurately describes the relationship between liquidity and yield spreads relative to Treasury issues? All else being equal, bonds with: 8. A narrowing of credit spreads would least impact the value of which of the following investment?
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3 9. Given two bonds that are equivalent in all respects except tax status, the marginal tax rate that will make an investor indifferent between an 8.2% taxable bond and a 6.2% tax-exempt bond is closest to: A. 24.39% B. 76.61% C. 37.04% D. 43.47% Answer: A
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