are171a-midterm-key-pink-yellow

are171a-midterm-key-pink-yellow - ARE I71A MIDTERM NAME: _...

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ARE I71A MIDTERM NAME: _ This exam has two sections. Section A consists of 11 multiple choice questions worth 10 points each for a total of 110 out of350 total possible points (about 31 % ofexam). Section B is made up of6 short problems, worth 40 points each. This adds upto 240 outofthe total possible points on the exam (69% ofexam). Showyour work in section B; partial credit can be earned for correct approach even iffinal answer is wrong.
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Section A. (10 pts. each) 1. Dawn purchased a newly issued 20-year corporate bond 5 years ago, at its par value of$1000. Today, she received a notice that the bond will be called, at a call price of$1075. What is her likely response? a. She is pleased, because she will make an unanticipated capital gain of$75. (E) She is displeased, because the bond is worth more if it is not called. c. She is neutral, because the yield to call will be the same as the yield to maturity. 2. Recently the Federal Reserve has pursued an unusual policy of"quantitative easing". What is the likely effect ofthis policy? a. Reduce long-term interest rates b. Make the Treasury yield curve less steep c. Raise the market value of currently outstanding Treasury bonds @All ofthe above e. None ofthe above 3. Supposeyoupurchase a newly issued 30-yearAAA corporatebond today for $1000, having a coupon rate of6%. However, over the next few years, you expect inflation (and thus the general level of interest rates) to rise. What is likely to occur? A Ifyou hold your bond for 30 years, you will receive a yield of less than 6%. UY Ifyou sell your bond in the next few years, you will receive a yield of less than 6%. c. Both a and b are true. d. Neither a nor b are true. 4. Suppose a US Treasury bond with 5 years remaining to maturity and a coupon rate of4.8% is selling for $1200. What does this imply? a. In today's market, newly issued 5-year Treasuries offer a coupon rate of less than 4.8%. b. This bond's current yield is 4.00%. c. This bond's YTM is less than 4.00% @ All ofthe above. e. None ofthe above. 5. When would you be most likely to see an inverted yield curve? ~ Economic activity has been weak, but is expected to improve. l!YEconomic activity has been strong, but is expected to weaken. c. Economic activity has been weak, and is expected to remain so. d. Economic activity has been strong, and is expected to remain so. 6. Suppose a City of Riverton, Wyoming municipal bond with 5 years to maturity has a YTM of 3.5%, while a US Treasury bond with 5 years to maturity has a YTM of 1.6%. What could explain this difference? a. This muni will receive a more favorable tax treatment than the Treasury. ® This municipal bond may have a substantial default premium. c. Both a and b could be possible reasons for the observed yield difference. d. Neither a nor b could be possible explanations for the observed yield difference. 7. What is an advantage oforganizing as an S-corporation instead of a partnership? Simplicity ofgetting started.
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are171a-midterm-key-pink-yellow - ARE I71A MIDTERM NAME: _...

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