Question 1

The call feature of a long-term bond _______.

Accepted Answer

A)  is an optional retirement provision 
B)  states the call price 
C)  allows the issuer to replace a high coupon bond with a lower coupon bond 
D)  All of these are correct 
A)  is an optional retirement provision 
B)  states the call price 
C)  allows the issuer to replace a high coupon bond with a lower coupon bond 
D)  All of these are correct

Question 2

An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity (to the nearest tenth of 1 percent)?

Accepted Answer

A)  9.2% 
B)  8.8% 
C)  9.8% 
D)  10.2% 
A)  9.2% 
B)  8.8% 
C)  9.8% 
D)  10.2%

Question 3

WPI has a bond issue outstanding that has a coupon rate of 10% and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semiannually and has 10 years to mature?

Accepted Answer

A)  $941 
B)  $1,021 
C)  $1,000 
D)  $885 
A)  $941 
B)  $1,021 
C)  $1,000 
D)  $885

Question 4

Original issue deep discount bonds have decreased in popularity over the last several years due to:

Accepted Answer

A)  changes in tax laws 
B)  issuance by brokerage firms of higher risk substitutes 
C)  increased interest in equity securities 
D)  None of these are correct 
A)  changes in tax laws 
B)  issuance by brokerage firms of higher risk substitutes 
C)  increased interest in equity securities 
D)  None of these are correct

Question 5

If an American Water Company bond has a coupon rate of 9 percent and is selling for $920, then the yield to maturity must be _____.

Accepted Answer

A)  greater than 9% 
B)  equal to 9% 
C)  less than 9% 
D)  Cannot be determined 
A)  greater than 9% 
B)  equal to 9% 
C)  less than 9% 
D)  Cannot be determined

Question 6

If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at ___________.

Accepted Answer

A)  a rate less than 8% 
B)  8% 
C)  a rate greater than 8% 
D)  Cannot be determined 
A)  a rate less than 8% 
B)  8% 
C)  a rate greater than 8% 
D)  Cannot be determined

Question 7

The quality of a debenture depends on the ____________.

Accepted Answer

A)  general credit-worthiness of the issuing company 
B)  value of the assets used as collateral 
C)  coupon rate of the debenture 
D)  length of time to maturity 
A)  general credit-worthiness of the issuing company 
B)  value of the assets used as collateral 
C)  coupon rate of the debenture 
D)  length of time to maturity

Question 8

What is the yield-to-maturity of a Viacom bond that is selling for $948.75 with 6 years to maturity and a 7% coupon?

Accepted Answer

A)  7.01% 
B)  8.11% 
C)  8.38% 
D)  7.38% 
A)  7.01% 
B)  8.11% 
C)  8.38% 
D)  7.38%

Question 9

Which of the following is NOT one of the many differences between long-term debt and preferred stock?

Accepted Answer

A)  Long-term debt pays interest, which is tax-deductible to the borrower. 
B)  Preferred stockholders are paid before creditors if the company bankrupts. 
C)  Preferred stockholders are considered non-voting owners of the company. 
D)  The firm is not legally required to pay preferred stock dividends but must pay interest to creditors. 
A)  Long-term debt pays interest, which is tax-deductible to the borrower. 
B)  Preferred stockholders are paid before creditors if the company bankrupts. 
C)  Preferred stockholders are considered non-voting owners of the company. 
D)  The firm is not legally required to pay preferred stock dividends but must pay interest to creditors.

Question 10

The length of time that an investor keeps an asset is called _____.

Accepted Answer

A)  the retention period 
B)  the holding period 
C)  the maintenance period 
D)  None of these are correct 
A)  the retention period 
B)  the holding period 
C)  the maintenance period 
D)  None of these are correct

Question 11

The State of New York issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment.

Accepted Answer

A)  $25 
B)  $5 
C)  $10 
D)  $50 
A)  $25 
B)  $5 
C)  $10 
D)  $50

Question 12

Explain a sinking fund.

Accepted Answer

Lenders require that the borrowing compa

Question 13

A unique characteristic of bearer bonds is _____.

Accepted Answer

A)  the name and country of the bond owner is on the bond 
B)  the name and country of the bond owner is not on the bond 
C)  the name and country of the bond owner is on the bond, but the owner does not need to pay taxes on interest received 
D)  the bond is heavily regulated and requires full disclosure to avoid fraud 
A)  the name and country of the bond owner is on the bond 
B)  the name and country of the bond owner is not on the bond 
C)  the name and country of the bond owner is on the bond, but the owner does not need to pay taxes on interest received 
D)  the bond is heavily regulated and requires full disclosure to avoid fraud

Question 14

The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables EXCEPT the ____________.

Accepted Answer

A)  current price 
B)  required rate of return on the bond 
C)  uniform annual interest payments 
D)  maturity value 
A)  current price 
B)  required rate of return on the bond 
C)  uniform annual interest payments 
D)  maturity value

Question 15

Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay interest semi-annually, will mature in 15 years, but the firm has the option to call the bond in 10 years at a premium of 106. You believe that Rascal will call the bonds in 10 years. If you require a pre-tax return of 9.5% on bonds of this risk, how much would you pay for one of these bonds today?

Accepted Answer

A)  $1,000 
B)  $1,094 
C)  $1,034 
D)  $1,058 
A)  $1,000 
B)  $1,094 
C)  $1,034 
D)  $1,058

Question 16

An advantage of preferred stock financing is preferred ______.

Accepted Answer

A)  stockholders can vote for the Board of Directors and be an integral part of the direction of the company 
B)  stock dividends are tax-deductible for the investor 
C)  stock dividends are flexible, and the penalties for not paying a dividend are not severe 
D)  stock is the most preferred method of raising capital 
A)  stockholders can vote for the Board of Directors and be an integral part of the direction of the company 
B)  stock dividends are tax-deductible for the investor 
C)  stock dividends are flexible, and the penalties for not paying a dividend are not severe 
D)  stock is the most preferred method of raising capital

Question 17

Which of the following statements is (are) correct about long-term loans?
 I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds.
II. The quality of a debenture depends on the general creditworthiness of the issuing company.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 18

Unsecured income bonds are considered ____ securities.

Accepted Answer

A)  strong 
B)  government 
C)  weak 
D)  noncorruptible 
A)  strong 
B)  government 
C)  weak 
D)  noncorruptible

Question 19

In the Treasury bill quote that follows, the price of the bill can be calculated from the ____ price. $\begin{array}{ll}
\text { Mat date } & \text { Bid } &\text { Asked }&\text { Yield }\9-24&8.34&8.29&8.58
\end{array}$

Accepted Answer

A)  bid 
B)  asked 
C)  yield 
D)  None of these are correct 
A)  bid 
B)  asked 
C)  yield 
D)  None of these are correct

Question 20

Penny Pincher Discount Grocers has issued a bond with a coupon rate of 11%. It recently closed at a price of $1023.75. What is the bond's current yield?

Accepted Answer

A)  10.75% 
B)  3.25%% 
C)  12.8% 
D)  8.9% 
A)  10.75% 
B)  3.25%% 
C)  12.8% 
D)  8.9%

Exam 7: Fixed Income Securities: Characteristics and Valuation

The call feature of a long-term bond _______.

An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity (to the nearest tenth of 1 percent)?

WPI has a bond issue outstanding that has a coupon rate of 10% and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semiannually and has 10 years to mature?

Original issue deep discount bonds have decreased in popularity over the last several years due to:

If an American Water Company bond has a coupon rate of 9 percent and is selling for $920, then the yield to maturity must be _____.

If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at ___________.

The quality of a debenture depends on the ____________.

What is the yield-to-maturity of a Viacom bond that is selling for $948.75 with 6 years to maturity and a 7% coupon?

Which of the following is NOT one of the many differences between long-term debt and preferred stock?

The length of time that an investor keeps an asset is called _____.

The State of New York issued $50 million of perpetual bonds in 1990. The bonds were issued in $100 denominations with an annual coupon interest rate of 5%. Determine the value of these bonds today to an investor who requires a 10% return on his investment.

Explain a sinking fund.

A unique characteristic of bearer bonds is _____.

The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables EXCEPT the ____________.

An advantage of preferred stock financing is preferred ______.

Which of the following statements is (are) correct about long-term loans? I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds. II. The quality of a debenture depends on the general creditworthiness of the issuing company.

Unsecured income bonds are considered ____ securities.

In the Treasury bill quote that follows, the price of the bill can be calculated from the ____ price. Mat date Bid Asked Yield 9-24 8.34 8.29 8.58

Penny Pincher Discount Grocers has issued a bond with a coupon rate of 11%. It recently closed at a price of $1023.75. What is the bond's current yield?

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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