Question 1

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

Accepted Answer

A)  8.20% 
B)  11.34% 
C)  8.82% 
D)  12.20% 
A)  8.20% 
B)  11.34% 
C)  8.82% 
D)  12.20%

Question 2

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000 and that it pays interest semiannually.

Accepted Answer

A)  $1,170 
B)  $999 
C)  $1,095 
D)  $1,173 
A)  $1,170 
B)  $999 
C)  $1,095 
D)  $1,173

Question 3

Which of the following statements concerning preferred stocks is true?

Accepted Answer

A)  Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders. 
B)  Preferred stock dividends per share are normally increased as the earnings of the firm increase. 
C)  Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems. 
D)  The par value of a stock is always the same as the initial selling price. 
A)  Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders. 
B)  Preferred stock dividends per share are normally increased as the earnings of the firm increase. 
C)  Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems. 
D)  The par value of a stock is always the same as the initial selling price.

Question 4

There is a(n) ____ relationship between the value of a bond and its required rate of return.

Accepted Answer

A)  direct 
B)  distant 
C)  inverse 
D)  turgid 
A)  direct 
B)  distant 
C)  inverse 
D)  turgid

Question 5

Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years. In 2008 (today) the required return on bonds of this risk was 11%. The bonds pay interest semiannually. What would you be willing to pay for one of these bonds today if you believe the bond will be called today?

Accepted Answer

A)  $1,188.00 
B)  $832.25 
C)  $1,100.00 
D)  $1,246.98 
A)  $1,188.00 
B)  $832.25 
C)  $1,100.00 
D)  $1,246.98

Question 6

There are various types of government debt securities. Which of the following is considered a long-term government debt instrument?

Accepted Answer

A)  Treasury bills 
B)  Treasury notes 
C)  Treasury bonds 
D)  Debentures 
A)  Treasury bills 
B)  Treasury notes 
C)  Treasury bonds 
D)  Debentures

Question 7

Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semiannually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?

Accepted Answer

A)  $943 
B)  $1059 
C)  $954 
D)  $1,000 
A)  $943 
B)  $1059 
C)  $954 
D)  $1,000

Question 8

Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation?

Accepted Answer

A)  sinking fund 
B)  call feature 
C)  floating coupon rates 
D)  poison put covenant 
A)  sinking fund 
B)  call feature 
C)  floating coupon rates 
D)  poison put covenant

Question 9

Zimmer Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price.

Accepted Answer

A)  19.0% 
B)  11.4% 
C)  10.9% 
D)  11.7% 
A)  19.0% 
B)  11.4% 
C)  10.9% 
D)  11.7%

Question 10

A refrigerator manufacturer, Zero King, issued a zero coupon bond with 10 years to maturity. What is the yield-to-maturity of this bond if it is sold for $352?

Accepted Answer

A)  12.2% 
B)  10% 
C)  11% 
D)  9% 
A)  12.2% 
B)  10% 
C)  11% 
D)  9%

Question 11

The major advantages of long-term debt include all the following EXCEPT _______.

Accepted Answer

A)  decreased financial risk 
B)  relatively low after-tax cost 
C)  firm owners' ability to maintain control over their firm 
D)  increased earnings per share through financial leverage 
A)  decreased financial risk 
B)  relatively low after-tax cost 
C)  firm owners' ability to maintain control over their firm 
D)  increased earnings per share through financial leverage

Question 12

Which of the following is NOT a characteristic of long-term debt?

Accepted Answer

A)  Interest paid to bondholders is a tax-deductible expense to the firm. 
B)  The firm is not legally required to pay interest to bondholders. 
C)  It usually has a specific maturity. 
D)  Its holders have a fixed claim on the firm's assets in the event of bankruptcy. 
A)  Interest paid to bondholders is a tax-deductible expense to the firm. 
B)  The firm is not legally required to pay interest to bondholders. 
C)  It usually has a specific maturity. 
D)  Its holders have a fixed claim on the firm's assets in the event of bankruptcy.

Question 13

When does market equilibrium for an asset exist?

Accepted Answer

A)  when there is no tendency for the price of the asset to move higher or lower 
B)  when the bid price equals the ask price 
C)  when the asset can be resold at a profit 
D)  when the asset can be bought at a discount 
A)  when there is no tendency for the price of the asset to move higher or lower 
B)  when the bid price equals the ask price 
C)  when the asset can be resold at a profit 
D)  when the asset can be bought at a discount

Question 14

By the capitalization of cash flow method, the value of an asset is a function of ____________.

Accepted Answer

A)  the book value of the asset 
B)  required rate of return 
C)  the age of the asset 
D)  All of these are correct 
A)  the book value of the asset 
B)  required rate of return 
C)  the age of the asset 
D)  All of these are correct

Question 15

Yummy Tummy Bakeries has issued a 30-year par value bond that is callable in 5 years. If the coupon rate is 5.5% payable semiannually, what is the bond's yield to call if the yield to maturity is 8% and the call premium is one year's interest?

Accepted Answer

A)  12.65% 
B)  18.91% 
C)  14.42% 
D)  10.62% 
A)  12.65% 
B)  18.91% 
C)  14.42% 
D)  10.62%

Question 16

What is the yield to maturity of a bond with 10 years to maturity and a coupon of 15%? The current price of this bond is $1,109. Assume interest is paid annually.

Accepted Answer

A)  12.0% 
B)  12.5% 
C)  13.0% 
D)  13.5% 
A)  12.0% 
B)  12.5% 
C)  13.0% 
D)  13.5%

Question 17

Which of the following is the highest risk debt issue?

Accepted Answer

A)  senior debt 
B)  mortgage bond 
C)  equipment trust certificate 
D)  debenture 
A)  senior debt 
B)  mortgage bond 
C)  equipment trust certificate 
D)  debenture

Question 18

Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?

Accepted Answer

A)  $352 
B)  $404 
C)  $413 
D)  $163 
A)  $352 
B)  $404 
C)  $413 
D)  $163

Question 19

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?

Accepted Answer

A)  8.3% 
B)  16.1% 
C)  16.6% 
D)  14.3% 
A)  8.3% 
B)  16.1% 
C)  16.6% 
D)  14.3%

Question 20

Grace Corp. has a zero-coupon bond outstanding that matures in 15 years. This bond is selling for $327.50 today and will pay $1,000 at maturity. What is the yield to maturity to the investor who buys the bond and holds it until maturity?

Accepted Answer

A)  7.73% 
B)  9.33% 
C)  9.23% 
D)  9.77% 
A)  7.73% 
B)  9.33% 
C)  9.23% 
D)  9.77%

Exam 7: Fixed Income Securities: Characteristics and Valuation

What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

Which of the following statements concerning preferred stocks is true?

There is a(n) ____ relationship between the value of a bond and its required rate of return.

There are various types of government debt securities. Which of the following is considered a long-term government debt instrument?

Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semiannually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?

Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation?

Zimmer Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price.

A refrigerator manufacturer, Zero King, issued a zero coupon bond with 10 years to maturity. What is the yield-to-maturity of this bond if it is sold for $352?

The major advantages of long-term debt include all the following EXCEPT _______.

Which of the following is NOT a characteristic of long-term debt?

When does market equilibrium for an asset exist?

By the capitalization of cash flow method, the value of an asset is a function of ____________.

Yummy Tummy Bakeries has issued a 30-year par value bond that is callable in 5 years. If the coupon rate is 5.5% payable semiannually, what is the bond's yield to call if the yield to maturity is 8% and the call premium is one year's interest?

What is the yield to maturity of a bond with 10 years to maturity and a coupon of 15%? The current price of this bond is $1,109. Assume interest is paid annually.

Which of the following is the highest risk debt issue?

Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?

Grace Corp. has a zero-coupon bond outstanding that matures in 15 years. This bond is selling for $327.50 today and will pay $1,000 at maturity. What is the yield to maturity to the investor who buys the bond and holds it until maturity?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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