Question 1

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 2

Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners.These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%.Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.

Accepted Answer

A) $626 
B) $463 
C) $897 
D) $270 
A) $626 
B) $463 
C) $897 
D) $270

Question 3

What is the required rate of return to the investor who is willing to purchase a Duke Power preferred stock with an $8.70 dividend, a par value of $100, and a current market price of $87?

Accepted Answer

A) 10.7% 
B) 8.7% 
C) 9.4% 
D) 10.0% 
A) 10.7% 
B) 8.7% 
C) 9.4% 
D) 10.0%

Question 4

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 5

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 lower risk substitutes 
C) increased interest in equity securities 
D) changes in tax laws and issuance by brokerage firms of lower risk substitutes 
A) changes in tax laws 
B) issuance by brokerage firms of lower risk substitutes 
C) increased interest in equity securities 
D) changes in tax laws and issuance by brokerage firms of lower risk substitutes

Question 6

A sinking fund allows the issuer to

Accepted Answer

A) redeem an entire debt issue prior to maturity 
B) purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption 
C) call the entire debt issue 
D) accumulate interest expenses into a sinking fund account 
A) redeem an entire debt issue prior to maturity 
B) purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption 
C) call the entire debt issue 
D) accumulate interest expenses into a sinking fund account

Question 7

bonds normally are denominated in the currency of the country of sale.

Accepted Answer

A) Eurodollar 
B) International 
C) Foreign 
D) LIBOR 
A) Eurodollar 
B) International 
C) Foreign 
D) LIBOR

Question 8

Determine the yield to maturity to the nearest tenth of 1 percent of a zero coupon bond with 8 years to maturity that is currently selling for $404.

Accepted Answer

A) 11.3% 
B) 12.3% 
C) 11.7% 
D) 12.0% 
A) 11.3% 
B) 12.3% 
C) 11.7% 
D) 12.0%

Question 9

Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year.Determine the value of this preferred stock to an investor who requires a 12 percent rate of return.

Accepted Answer

A) $3.25 
B) $39 
C) $12 
D) $27.08 
A) $3.25 
B) $39 
C) $12 
D) $27.08

Question 10

The State of Adaven 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 rate of return or current yield on these bonds if they are purchased at the current price of $40.

Accepted Answer

A) 12.5% 
B) 8.0% 
C) 5.0% 
D) 1.25% 
A) 12.5% 
B) 8.0% 
C) 5.0% 
D) 1.25%

Question 11

In reading price quotes on U.S.Treasury bills, you would expect to find the "asked" price higher than the "bid".

Accepted Answer

A) always 
B) never 
C) sometimes 
D) seldom 
A) always 
B) never 
C) sometimes 
D) seldom

Question 12

Treasury bills

Accepted Answer

A) have a stated interest rate 
B) pay no explicit interest 
C) are sold for exactly $10,000 
D) are quoted in terms of yield to maturity 
A) have a stated interest rate 
B) pay no explicit interest 
C) are sold for exactly $10,000 
D) are quoted in terms of yield to maturity

Question 13

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 semi-annually.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) $1188 
B) $832.25 
C) $1,100 
D) $1,000 
A) $1188 
B) $832.25 
C) $1,100 
D) $1,000

Question 14

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) the 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) the coupon rate of the debenture 
D) length of time to maturity

Question 15

ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest.Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625.

Accepted Answer

A) 5.0% 
B) 8.0% 
C) 3.1% 
D) 6.25% 
A) 5.0% 
B) 8.0% 
C) 3.1% 
D) 6.25%

Question 16

An advantage of preferred stock financing is:

Accepted Answer

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

Question 17

A General Electric 7½25 bond closed at 98.What is the current yield?

Accepted Answer

A) 7.65% 
B) 7.81% 
C) 7.50% 
D) 7.34% 
A) 7.65% 
B) 7.81% 
C) 7.50% 
D) 7.34%

Question 18

The largest user of mortgage bonds is

Accepted Answer

A) credit unions. 
B) commercial banks. 
C) utility companies. 
D) small companies. 
A) credit unions. 
B) commercial banks. 
C) utility companies. 
D) small companies.

Question 19

An indenture on long-term debt does all of the following EXCEPT:

Accepted Answer

A) It lists restrictions placed on the borrower by the lender. 
B) It specifies the manner in which the principal must be repaid. 
C) It allows the borrower to borrow extensively so that the interest may be regularly paid. 
D) It details the nature of the debt issue. 
A) It lists restrictions placed on the borrower by the lender. 
B) It specifies the manner in which the principal must be repaid. 
C) It allows the borrower to borrow extensively so that the interest may be regularly paid. 
D) It details the nature of the debt issue.

Question 20

What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00.

Accepted Answer

A) $85.71 
B) $38.14 
C) $59.33 
D) $60.00 
A) $85.71 
B) $38.14 
C) $59.33 
D) $60.00

Exam 6: Fixed-Income Securities: Characteristics and Valuation

A unique characteristic of bearer bonds is:

What is the required rate of return to the investor who is willing to purchase a Duke Power preferred stock with an $8.70 dividend, a par value of $100, and a current market price of $87?

Which of the following statements concerning preferred stocks is true?

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

A sinking fund allows the issuer to

bonds normally are denominated in the currency of the country of sale.

Determine the yield to maturity to the nearest tenth of 1 percent of a zero coupon bond with 8 years to maturity that is currently selling for $404.

Assume that the dividend on Central Power Company's $3.25 preferred stock issue is paid annually at the end of the year.Determine the value of this preferred stock to an investor who requires a 12 percent rate of return.

The State of Adaven 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 rate of return or current yield on these bonds if they are purchased at the current price of $40.

In reading price quotes on U.S.Treasury bills, you would expect to find the "asked" price higher than the "bid".

Treasury bills

The quality of a debenture depends on the

ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest.Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625.

An advantage of preferred stock financing is:

A General Electric 7½25 bond closed at 98.What is the current yield?

The largest user of mortgage bonds is

An indenture on long-term debt does all of the following EXCEPT:

What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00.

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

A: The Time Value of Money

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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