Quiz Space

Corporate Finance · Quiz 2 · 16 Mar 2025 · January 2025 term

Question 9: Suppose a 1-year government bond is offering an 8% rate o…

Question 9

+4 marksOne correct option

Suppose a 1-year government bond is offering an 8% rate of return. Sumit has Rs 20,000, which he can invest in government bonds or lend to his friend Ramesh. He believes that Ramesh will pay back the promised amount with a 75% probability and will pay back nothing with a 25% probability. Assume that Sumit is risk neutral. What is the default premium that Sumit should ask from Ramesh?

  1. A

    37%

  2. B

    36%

  3. C

    17%

  4. D

    10%

Show answer

Correct answer

  • B

    36%

See the whole paperTake it as a mock test

Question 9 of 25 in the IIT Madras BS Corporate Finance (Corporate Finance) Quiz 2 paper sat on 16 Mar 2025, in the January 2025 term (IIT M DEGREE AN EXAM QDB2 16 Mar 2025). It carries 4 marks.

More questions from this paper

  1. Q1Which of the following statements is incorrect?
  2. Q2At the optimal consumption point
  3. Q3What is the potential risk of short selling?
  4. Q4Which of the following statements is correct?
  5. Q5If the utility function of an individual is a linear function over wealth, what can we say about the individual’s risk …
  6. Q6A borrower is called insolvent if
  7. Q7Sarah has mean-variance preferences represented by the utility function U = 2\mu - 10\sigma^2, where \mu is the expecte…
  8. Q8What would be the fair price of a bet that pays 100 with a 20% probability, pays 80 with a 40% probability and pays 60 …
  9. Q10Axis Bank has assets of 1500 units, liabilities of 750 units and capital of 750 units. What is the leverage ratio for A…
  10. Q11There are two assets: a risk-free asset that offers a 6% rate of return and a risky asset that has an expected rate of …
  11. Q12Asset A has a correlation of 0.4 with the market and a standard deviation of 16%. If the market return has a standard d…
  12. Q13You create a portfolio of 9 identical assets that have an expected return of 22% and a standard deviation of 12%. These…
  13. Q14A grocery store can be worth 100 thousand in two years with a 35% probability or 200 thousand in two years with a 65% p…
  14. Q15Figure question
  15. Q16Suppose Rakesh decides to short sell 50 shares of Wipro Inc. The current share price for Wipro Inc is Rs 200. At the en…
  16. Q17What would be the appropriate promised rate of return that the creditor of the loan would demand?
  17. Q18What is the expected payoff for the equity owner in the next year?
  18. Q19What is Nikita’s expected utility?
  19. Q20If Nikita pays p for an insurance policy that would pay her 600 units if she suffered a severe injury, then she would b…
  20. Q21A portfolio is formed with 60% of wealth invested in Asset 1 and 40% of wealth invested in Asset 2. What would be the e…
  21. Q22What would be the standard deviation of the rate of return of the portfolio?
  22. Q23Suppose you would like to construct a portfolio with an expected rate of return of 19%. What weights would you put on A…
  23. Q24What are the weights of Asset 1 and Asset 2 in the minimum variance portfolio?
  24. Q25What is the expected rate of return of the minimum variance portfolio?