Question 1

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 2

The major advantages of long-term debt include all the following except:

Accepted Answer

A) decrease in financial risk 
B) relatively low, explicit after-tax cost 
C) owners are able to maintain control 
D) increased earnings per share through using financial leverage 
A) decrease in financial risk 
B) relatively low, explicit after-tax cost 
C) owners are able to maintain control 
D) increased earnings per share through using financial leverage

Question 3

How much would you have to pay for a U.S.Government bond ($1,000 maturity value) scheduled to mature in February, 2020 and quoted at 118:07 "bid" and 118:15 "asked"?

Accepted Answer

A) $1,182.19 
B) $1,181.50 
C) $1,184.69 
D) $1,180.70 
A) $1,182.19 
B) $1,181.50 
C) $1,184.69 
D) $1,180.70

Question 4

If an American Water Company bond has a coupon rate of 9.0 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 5

The value of a 15-year bond will change for a given change in the required rate of return than the value of a 5 year bond.

Accepted Answer

A) more 
B) less 
C) the same percentage 
D) exactly the same 
A) more 
B) less 
C) the same percentage 
D) exactly the same

Question 6

Junk bonds (i.e., bonds issued by companies with weak financial positions) are rated or lower by Moody's.

Accepted Answer

A) Baa 
B) BBB 
C) Ba 
D) CCC 
A) Baa 
B) BBB 
C) Ba 
D) CCC

Question 7

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 8

An Allied Northern preferred stock pays a $3.84 annual dividend.What is the value of the stock to an investor who requires a 9.5 percent return?

Accepted Answer

A) $40.42 
B) $42.67 
C) $38.40 
D) $37.60 
A) $40.42 
B) $42.67 
C) $38.40 
D) $37.60

Question 9

The required rate of return on an asset is a function of the .

Accepted Answer

A) risk associated with the asset 
B) risk-free interest rate 
C) age of the asset 
D) risk associated with the asset and the risk-free interest rate 
A) risk associated with the asset 
B) risk-free interest rate 
C) age of the asset 
D) risk associated with the asset and the risk-free interest rate

Question 10

There are consequences associated with not paying interest to bondholders.Which of the following apply?

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 11

The value of a perpetual bond is equal to the annual interest payment divided by the:

Accepted Answer

A) risk-free rate 
B) required rate of return 
C) bank interest rate 
D) after-tax historical cost of capital 
A) risk-free rate 
B) required rate of return 
C) bank interest rate 
D) after-tax historical cost of capital

Question 12

Marko needs to raise capital through a zero-coupon bond debt offering.If the bonds will have 12 years to maturity and the rate of return on a bond in Marko's risk class is 11 percent, what will be the selling price of the bond?

Accepted Answer

A) $302.50 
B) $335.50 
C) $269.50 
D) $286.00 
A) $302.50 
B) $335.50 
C) $269.50 
D) $286.00

Question 13

By the capitalization-of-cash flows method, the value of an asset is a function of

Accepted Answer

A) the book value of the asset 
B) the risk of the asset's cash flows 
C) the age of the asset 
D) both the book value and the age of the asset 
A) the book value of the asset 
B) the risk of the asset's cash flows 
C) the age of the asset 
D) both the book value and the age of the asset

Question 14

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 15

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 16

Zero coupon bonds are an example of

Accepted Answer

A) original issue deep discount bonds 
B) extendible notes 
C) convertible bonds 
D) floating rate notes 
A) original issue deep discount bonds 
B) extendible notes 
C) convertible bonds 
D) floating rate notes

Question 17

What is the yield-to-maturity of a Viacom bond which 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 18

List the advantages and disadvantages of long-term debt financing:

Accepted Answer

Advantages:
1.The firm has a relatively

Question 19

An AT&T 5½05 bond with a current yield of 6.2% must be selling its face value.

Accepted Answer

A) above 
B) at 
C) below 
D) any of these could be correct 
A) above 
B) at 
C) below 
D) any of these could be correct

Question 20

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

Accepted Answer

A) interest paid to bond holders is a tax-deductible expense to the firm 
B) firm is not legally required to pay interest to bond-holders 
C) usually has a specific maturity 
D) all of these are characteristics of long-term debt 
A) interest paid to bond holders is a tax-deductible expense to the firm 
B) firm is not legally required to pay interest to bond-holders 
C) usually has a specific maturity 
D) all of these are characteristics of long-term debt

Exam 6: Fixed-Income Securities: Characteristics and Valuation

Which of the following is the highest risk debt issue?

The major advantages of long-term debt include all the following except:

How much would you have to pay for a U.S.Government bond ($1,000 maturity value) scheduled to mature in February, 2020 and quoted at 118:07 "bid" and 118:15 "asked"?

If an American Water Company bond has a coupon rate of 9.0 percent and is selling for $920, then the yield to maturity must be:

The value of a 15-year bond will change for a given change in the required rate of return than the value of a 5 year bond.

Junk bonds (i.e., bonds issued by companies with weak financial positions) are rated or lower by Moody's.

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 Allied Northern preferred stock pays a $3.84 annual dividend.What is the value of the stock to an investor who requires a 9.5 percent return?

The required rate of return on an asset is a function of the .

There are consequences associated with not paying interest to bondholders.Which of the following apply?

The value of a perpetual bond is equal to the annual interest payment divided by the:

Marko needs to raise capital through a zero-coupon bond debt offering.If the bonds will have 12 years to maturity and the rate of return on a bond in Marko's risk class is 11 percent, what will be the selling price of the bond?

By the capitalization-of-cash flows method, the value of an asset is a function of

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?

Zero coupon bonds are an example of

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

List the advantages and disadvantages of long-term debt financing:

An AT&T 5½05 bond with a current yield of 6.2% must be selling its face value.

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

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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