Question 1

A call provision for the redemption of bonds:

Accepted Answer

A)  requires an advance payment of future interest to the bondholders. 
B)  allows the firm to refinance debt. 
C)  allows the firm to call the bonds for redemption after one year of maturity. 
D)  requires the redemption of the bonds at their market price. 
E)  requires bondholders to convert their bonds into lower coupon rate bonds. 
A)  requires an advance payment of future interest to the bondholders. 
B)  allows the firm to refinance debt. 
C)  allows the firm to call the bonds for redemption after one year of maturity. 
D)  requires the redemption of the bonds at their market price. 
E)  requires bondholders to convert their bonds into lower coupon rate bonds. B

Question 2

Banks that need additional funds to meet the reserve requirements of the Federal Reserve:

Accepted Answer

A)  borrow from the state government of the state where their headquarters are located. 
B)  borrow from banks with excess reserves. 
C)  issue treasury bills to investors. 
D)  decrease the coupon interest rate on the bonds issued to raise funds. 
E)  exercise the call option on the loans extended to small businesses. 
A)  borrow from the state government of the state where their headquarters are located. 
B)  borrow from banks with excess reserves. 
C)  issue treasury bills to investors. 
D)  decrease the coupon interest rate on the bonds issued to raise funds. 
E)  exercise the call option on the loans extended to small businesses. B

Question 3

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? (Round the answer to the nearest whole number.)

Accepted Answer

A)  $1,273 
B)  $1,000 
C)  $7,783 
D)  $550 
E)  $450 
A)  $1,273 
B)  $1,000 
C)  $7,783 
D)  $550 
E)  $450 D

Question 4

General obligation bonds are backed:

Accepted Answer

A)  by the revenue generated from the project in which the bond proceeds are invested. 
B)  by the government's ability to tax its citizens. 
C)  by the penalty collected from the earlier repayment of a certificate of deposit. 
D)  by the increase in the coupon rate due to inflation adjustment. 
E)  by the additional principal received from exchange rate fluctuations. 
A)  by the revenue generated from the project in which the bond proceeds are invested. 
B)  by the government's ability to tax its citizens. 
C)  by the penalty collected from the earlier repayment of a certificate of deposit. 
D)  by the increase in the coupon rate due to inflation adjustment. 
E)  by the additional principal received from exchange rate fluctuations.

Question 5

Banks generally use the federal funds market to:

Accepted Answer

A)  repay loans to investors. 
B)  adjust their reserves. 
C)  make interest payments on loans. 
D)  make security deposits with other banks. 
E)  repay loans to the federal government. 
A)  repay loans to investors. 
B)  adjust their reserves. 
C)  make interest payments on loans. 
D)  make security deposits with other banks. 
E)  repay loans to the federal government.

Question 6

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and have effectively refinanced at a lower rate.

Accepted Answer

A) True 
 B)False

Question 7

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

Accepted Answer

A) True 
 B)False

Question 8

A debt is said to be selling at par, when the _____ of the debt is equal to the _____.

Accepted Answer

A)  par value; discounted value of the interest payments 
B)  principal value; discount on the issue of a zero coupon bond 
C)  face value; premium payment on the exercise of a call provision 
D)  market value; face value of the debt 
E)  maturity value; par value of the debt 
A)  par value; discounted value of the interest payments 
B)  principal value; discount on the issue of a zero coupon bond 
C)  face value; premium payment on the exercise of a call provision 
D)  market value; face value of the debt 
E)  maturity value; par value of the debt

Question 9

Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30 interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of return to invest in this bond, what is the maximum price the investor should be willing to pay to purchase the bond? (Round the answer to two decimal places.)

Accepted Answer

A)  $761.15 
B)  $939.53 
C)  $940.29 
D)  $965.63 
E)  $1,062.81 
A)  $761.15 
B)  $939.53 
C)  $940.29 
D)  $965.63 
E)  $1,062.81

Question 10

The two principal types of municipal bonds are:

Accepted Answer

A)  general obligation bonds and income bonds. 
B)  income bonds and putable bonds. 
C)  revenue bonds and general obligation bonds. 
D)  floating-rate bonds and indexed bonds. 
E)  floating-rate bonds and revenue bonds. 
A)  general obligation bonds and income bonds. 
B)  income bonds and putable bonds. 
C)  revenue bonds and general obligation bonds. 
D)  floating-rate bonds and indexed bonds. 
E)  floating-rate bonds and revenue bonds.

Question 11

A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 12

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.

Accepted Answer

A) True 
 B)False

Question 13

A(n) _____ can be exchanged for shares of equity at the owner's discretion.

Accepted Answer

A)  debenture 
B)  indenture 
C)  callable bond 
D)  convertible bond 
E)  putable bond 
A)  debenture 
B)  indenture 
C)  callable bond 
D)  convertible bond 
E)  putable bond

Question 14

Which of the following is an advantage of convertible bonds?

Accepted Answer

A)  Investors can convert the bonds into higher coupon rate bonds. 
B)  Investors can choose to hold the company's bonds or convert the bonds into its stock. 
C)  Investors are paid a penalty on the conversion of the bonds. 
D)  Investors are redeemed for the difference between the face value and the market price on redemption of the bonds. 
E)  Investors can claim interest for the remaining life of the bonds on the bonds' early conversion. 
A)  Investors can convert the bonds into higher coupon rate bonds. 
B)  Investors can choose to hold the company's bonds or convert the bonds into its stock. 
C)  Investors are paid a penalty on the conversion of the bonds. 
D)  Investors are redeemed for the difference between the face value and the market price on redemption of the bonds. 
E)  Investors can claim interest for the remaining life of the bonds on the bonds' early conversion.

Question 15

Although common stock represents a riskier investment to an individual than do bonds, bonds represent a riskier method of financing to a corporation than does common stock.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is a result of setting the coupon rate on a bond immediately before it is issued?

Accepted Answer

A)  The coupon rate is equal to the yield to maturity on the bond. 
B)  The market interest rate is equal to the coupon rate of the bond. 
C)  The yield to maturity is equal to the market yield on the bond. 
D)  The issuing price equals the face (par) value of the bond. 
E)  The market value is equal to the maturity value of the bond. 
A)  The coupon rate is equal to the yield to maturity on the bond. 
B)  The market interest rate is equal to the coupon rate of the bond. 
C)  The yield to maturity is equal to the market yield on the bond. 
D)  The issuing price equals the face (par) value of the bond. 
E)  The market value is equal to the maturity value of the bond.

Question 17

The motivation for floating-rate bonds arose out of the costly experience of the early 1980s when inflation pushed interest rates to very high levels, causing sharp declines in the prices of long-term bonds.

Accepted Answer

A) True 
 B)False

Question 18

In general, long-term unsecured debts are less costly than long-term secured debts for a particular firm.

Accepted Answer

A) True 
 B)False

Question 19

Restrictive covenants are designed to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is true of a bond?

Accepted Answer

A)  The maturity value of a bond is always more than the market value of the bond. 
B)  Interest payments increase throughout the duration of a bond. 
C)  The maturity date of a bond is contractually fixed. 
D)  The call provision of a bond is exercised in the last year of the bond. 
E)  The market value of a bond is mentioned in the bond indenture. 
A)  The maturity value of a bond is always more than the market value of the bond. 
B)  Interest payments increase throughout the duration of a bond. 
C)  The maturity date of a bond is contractually fixed. 
D)  The call provision of a bond is exercised in the last year of the bond. 
E)  The market value of a bond is mentioned in the bond indenture.

A call provision for the redemption of bonds:

Banks that need additional funds to meet the reserve requirements of the Federal Reserve:

General obligation bonds are backed:

Banks generally use the federal funds market to:

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and have effectively refinanced at a lower rate.

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

A debt is said to be selling at par, when the _ of the debt is equal to the _.

The two principal types of municipal bonds are:

A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.

A(n) _____ can be exchanged for shares of equity at the owner's discretion.

Which of the following is an advantage of convertible bonds?

Although common stock represents a riskier investment to an individual than do bonds, bonds represent a riskier method of financing to a corporation than does common stock.

Which of the following is a result of setting the coupon rate on a bond immediately before it is issued?

The motivation for floating-rate bonds arose out of the costly experience of the early 1980s when inflation pushed interest rates to very high levels, causing sharp declines in the prices of long-term bonds.

In general, long-term unsecured debts are less costly than long-term secured debts for a particular firm.

Restrictive covenants are designed to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Which of the following statements is true of a bond?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 6: Bonds Debtcharacteristics and Valuation

A call provision for the redemption of bonds:

Banks that need additional funds to meet the reserve requirements of the Federal Reserve:

General obligation bonds are backed:

Banks generally use the federal funds market to:

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and have effectively refinanced at a lower rate.

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.

A debt is said to be selling at par, when the _____ of the debt is equal to the _____.

The two principal types of municipal bonds are:

A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.

A(n) _____ can be exchanged for shares of equity at the owner's discretion.

Which of the following is an advantage of convertible bonds?

Although common stock represents a riskier investment to an individual than do bonds, bonds represent a riskier method of financing to a corporation than does common stock.

Which of the following is a result of setting the coupon rate on a bond immediately before it is issued?

The motivation for floating-rate bonds arose out of the costly experience of the early 1980s when inflation pushed interest rates to very high levels, causing sharp declines in the prices of long-term bonds.

In general, long-term unsecured debts are less costly than long-term secured debts for a particular firm.

Restrictive covenants are designed to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Which of the following statements is true of a bond?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

A debt is said to be selling at par, when the _ of the debt is equal to the _.