Question 1

If the discount rate on a bond is 7 percent and the expected payment in year 1 is $952.50, calculate the price of the bond.

Accepted Answer

A) $1,050 
B) $985 
C) $890 
D) $935 
A) $1,050 
B) $985 
C) $890 
D) $935

Question 2

The value of a corporate bond can be thought of as

Accepted Answer

A) bond value without default - value of put. 
B) bond value without default + value of put. 
C) bond value without default + value of a stock. 
D) bond value without default - value of call. 
A) bond value without default - value of put. 
B) bond value without default + value of put. 
C) bond value without default + value of a stock. 
D) bond value without default - value of call.

Question 3

If the discount rate on a bond is 5 percent and the expected payment in year 1 is $985, calculate the price of the bond.

Accepted Answer

A) $1,050 
B) $985 
C) $938.10 
D) $1,000 
A) $1,050 
B) $985 
C) $938.10 
D) $1,000

Question 4

The three main bond rating agencies in the United States are
I.Moody's;
II.Standard and Poor's;
III.A.M. Best;
IV.Dominion Bond;
V.Fitch

Accepted Answer

A) I, II, and III 
B) I, II, and IV 
C) I, II, and V 
D) II, III, and IV 
A) I, II, and III 
B) I, II, and IV 
C) I, II, and V 
D) II, III, and IV

Question 5

Briefly explain the term credit scoring.

Accepted Answer

Credit scoring is used to distinguish be

Question 6

A corporate bond matures in one year. The bond promises interest of $50 and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $890.19, calculate the promised yield on the bond.

Accepted Answer

A) 6.6 percent 
B) 18 percent 
C) 7 percent 
D) 10.7 percent 
A) 6.6 percent 
B) 18 percent 
C) 7 percent 
D) 10.7 percent

Question 7

Bonds rated below BBB (Baa)are termed junk bonds.

Accepted Answer

A) True 
 B)False

Question 8

Use the following data: ROA = 10%; Total liabilities = 90% of assets; EBITDA = 10% of liabilities. Calculate the relative chance of failure using the following model: Log (relative chance of failure)= -6.445 - 1.192 ROA + 2.307 (liabilities/assets)- 0.346(EBITDA/liabilities).

Accepted Answer

A) 1.70 percent 
B) 1.09 percent 
C) 0.16 percent 
D) None of the options are correct. 
A) 1.70 percent 
B) 1.09 percent 
C) 0.16 percent 
D) None of the options are correct.

Question 9

Briefly explain the model developed by Beaver, McNichols, and Rhie to predict the chance of failure of a firm.

Accepted Answer

Beaver, McNichols, and Rhie have develop

Question 10

Bonds rated below BBB (Baa)are called

Accepted Answer

A) investment-grade bonds. 
B) junk bonds. 
C) default-free bonds. 
D) intermediate bonds. 
A) investment-grade bonds. 
B) junk bonds. 
C) default-free bonds. 
D) intermediate bonds.

Question 11

Generally, you can insure corporate bonds through a(n)

Accepted Answer

A) arrangement with the Treasury department. 
B) arrangement with the state government. 
C) credit default swap. 
D) back-dated options contract. 
A) arrangement with the Treasury department. 
B) arrangement with the state government. 
C) credit default swap. 
D) back-dated options contract.

Question 12

The value of a risky bond equals value of a bond without default - value of a put option on assets.

Accepted Answer

A) True 
 B)False

Question 13

A corporate bond matures in one year. The bond promises a $50 coupon and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $907.14, calculate the promised yield on the bond.

Accepted Answer

A) 6.6 percent 
B) 15.75 percent 
C) 5 percent 
D) 8.58 percent 
A) 6.6 percent 
B) 15.75 percent 
C) 5 percent 
D) 8.58 percent

Exam 23: Credit Risk and the Value of Corporate Debt

If the discount rate on a bond is 7 percent and the expected payment in year 1 is $952.50, calculate the price of the bond.

The value of a corporate bond can be thought of as

If the discount rate on a bond is 5 percent and the expected payment in year 1 is $985, calculate the price of the bond.

The three main bond rating agencies in the United States are I.Moody's; II.Standard and Poor's; III.A.M. Best; IV.Dominion Bond; V.Fitch

Briefly explain the term credit scoring.

A corporate bond matures in one year. The bond promises interest of $50 and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $890.19, calculate the promised yield on the bond.

Bonds rated below BBB (Baa)are termed junk bonds.

Use the following data: ROA = 10%; Total liabilities = 90% of assets; EBITDA = 10% of liabilities. Calculate the relative chance of failure using the following model: Log (relative chance of failure)= -6.445 - 1.192 ROA + 2.307 (liabilities/assets)- 0.346(EBITDA/liabilities).

Briefly explain the model developed by Beaver, McNichols, and Rhie to predict the chance of failure of a firm.

Bonds rated below BBB (Baa)are called

Generally, you can insure corporate bonds through a(n)

The value of a risky bond equals value of a bond without default - value of a put option on assets.

A corporate bond matures in one year. The bond promises a $50 coupon and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $907.14, calculate the promised yield on the bond.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters