Question 1

As junk bonds are such high-risk instruments, the returns on such bonds aren't very high.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following ratings by Standard & Poor's (S&P) indicates speculative bonds?

Accepted Answer

A)  A 
B)  B 
C)  BB 
D)  BBB 
E)  CCC 
A)  A 
B)  B 
C)  BB 
D)  BBB 
E)  CCC

Question 3

An increase in interest rates will increase the future value of a portfolio because the cash flows produced by the portfolio:

Accepted Answer

A)  will increase the maturity value of the bond. 
B)  can be reinvested at higher rates of return. 
C)  can be used to recall high-rate bonds. 
D)  will generate cash to pay future coupon interest. 
E)  will decrease the yield to maturity of the bond. 
A)  will increase the maturity value of the bond. 
B)  can be reinvested at higher rates of return. 
C)  can be used to recall high-rate bonds. 
D)  will generate cash to pay future coupon interest. 
E)  will decrease the yield to maturity of the bond.

Question 4

A debt is said to be selling at par when:

Accepted Answer

A)  investors' required rate of return from debt is equal to the coupon rate. 
B)  the market rate of return is more than the coupon rate of return. 
C)  the borrower pays the interest at the maturity of the debt. 
D)  the current market price of the debt is more than the face value of the debt. 
E)  the market value is equal to the face value of the debt. 
A)  investors' required rate of return from debt is equal to the coupon rate. 
B)  the market rate of return is more than the coupon rate of return. 
C)  the borrower pays the interest at the maturity of the debt. 
D)  the current market price of the debt is more than the face value of the debt. 
E)  the market value is equal to the face value of the debt.

Question 5

Federal funds represent:

Accepted Answer

A)  funds collected from federal tax payment by banks. 
B)  loans from the federal government to banks. 
C)  loans from one bank to another bank. 
D)  funds with banks for the repayment of loans to the federal government. 
E)  funds collected from investors for investment in federal securities. 
A)  funds collected from federal tax payment by banks. 
B)  loans from the federal government to banks. 
C)  loans from one bank to another bank. 
D)  funds with banks for the repayment of loans to the federal government. 
E)  funds collected from investors for investment in federal securities.

Question 6

The _____ of a bond fluctuates continuously during its life.

Accepted Answer

A)  principal value 
B)  face value 
C)  maturity value 
D)  coupon rate 
E)  market value 
A)  principal value 
B)  face value 
C)  maturity value 
D)  coupon rate 
E)  market value

Question 7

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today? (Round the answer to the nearest whole number.)

Accepted Answer

A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  1% 
A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  1%

Question 8

The conversion feature of a bond permits:

Accepted Answer

A)  the company to convert a high coupon rate bond into a lower rate bond. 
B)  the bondholder to exchange the bonds with a company's common stock. 
C)  the bondholder to redeem a small percentage of the bond every year. 
D)  the company to convert the face value of the bond to the market price of the bond. 
E)  the company to trade outstanding bonds with a term deposit in a financial institution. 
A)  the company to convert a high coupon rate bond into a lower rate bond. 
B)  the bondholder to exchange the bonds with a company's common stock. 
C)  the bondholder to redeem a small percentage of the bond every year. 
D)  the company to convert the face value of the bond to the market price of the bond. 
E)  the company to trade outstanding bonds with a term deposit in a financial institution.

Question 9

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

Accepted Answer

A)  equal to 12 percent. 
B)  greater than 12 percent. 
C)  less than 12 percent. 
D)  equal to 7.2 percent. 
E)  greater than 16.8 percent. 
A)  equal to 12 percent. 
B)  greater than 12 percent. 
C)  less than 12 percent. 
D)  equal to 7.2 percent. 
E)  greater than 16.8 percent.

Question 10

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.

Accepted Answer

A) True 
 B)False

Question 11

The Securities and Exchange Commission is required to verify that:

Accepted Answer

A)  the coupon rate of debt is more than the market interest rate. 
B)  all previous indenture provisions have been met before allowing a company to sell new securities to the public. 
C)  the market price of debt is more than the principal value of debt. 
D)  the face value of debt is more than the maturity value of debt. 
E)  the new securities to be sold to the public have a higher coupon rate than all previous security issues. 
A)  the coupon rate of debt is more than the market interest rate. 
B)  all previous indenture provisions have been met before allowing a company to sell new securities to the public. 
C)  the market price of debt is more than the principal value of debt. 
D)  the face value of debt is more than the maturity value of debt. 
E)  the new securities to be sold to the public have a higher coupon rate than all previous security issues.

Question 12

The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the bondholders will:

Accepted Answer

A)  receive a lower market value for the bond. 
B)  receive a higher principal at the maturity of the bond. 
C)  call back the bond before its maturity. 
D)  earn a lower return on the reinvested cash flows. 
E)  receive a lower coupon interest than mentioned in the bond indenture. 
A)  receive a lower market value for the bond. 
B)  receive a higher principal at the maturity of the bond. 
C)  call back the bond before its maturity. 
D)  earn a lower return on the reinvested cash flows. 
E)  receive a lower coupon interest than mentioned in the bond indenture.

Question 13

Which of the following is true of a traditional certificate of deposit (CD)?

Accepted Answer

A)  Money in traditional CDs must be kept at the issuing institution for a specified time period. 
B)  Traditional CDs pay no periodic interest. 
C)  Traditional CDs are repaid in installments by the issuing bank. 
D)  Traditional CDs have a floating rate of interest. 
E)  Traditional CDs are discounted when their market price is more than issue price. 
A)  Money in traditional CDs must be kept at the issuing institution for a specified time period. 
B)  Traditional CDs pay no periodic interest. 
C)  Traditional CDs are repaid in installments by the issuing bank. 
D)  Traditional CDs have a floating rate of interest. 
E)  Traditional CDs are discounted when their market price is more than issue price.

Question 14

The sinking fund provision requires a firm to:

Accepted Answer

A)  issue bonds every year to finance interest payment on bonds. 
B)  retire a portion of the bond issue each year. 
C)  increase the coupon rate by one percent every year. 
D)  use annual interest payments for the repayment of bonds. 
E)  gradually reduce the face value of debt to the level of market value of debt. 
A)  issue bonds every year to finance interest payment on bonds. 
B)  retire a portion of the bond issue each year. 
C)  increase the coupon rate by one percent every year. 
D)  use annual interest payments for the repayment of bonds. 
E)  gradually reduce the face value of debt to the level of market value of debt.

Question 15

The principal value of debt:

Accepted Answer

A)  is added to the interest payments to get the maturity value of the debt. 
B)  must be repaid at some point during the life of the debt to the investors. 
C)  is always half of the maturity value of the debt. 
D)  is equal to the market value of the debt. 
E)  always yields positive returns for investors. 
A)  is added to the interest payments to get the maturity value of the debt. 
B)  must be repaid at some point during the life of the debt to the investors. 
C)  is always half of the maturity value of the debt. 
D)  is equal to the market value of the debt. 
E)  always yields positive returns for investors.

Question 16

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

Accepted Answer

A)  debenture 
B)  income bond 
C)  indenture 
D)  subordinated debenture 
E)  mortgage bond 
A)  debenture 
B)  income bond 
C)  indenture 
D)  subordinated debenture 
E)  mortgage bond

Question 17

Which of the following types of bonds protects a bondholder against increases in interest rates?

Accepted Answer

A)  Floating-rate bonds 
B)  Income bonds 
C)  Bonds with call provisions 
D)  Municipal bonds 
E)  Mortgage bonds 
A)  Floating-rate bonds 
B)  Income bonds 
C)  Bonds with call provisions 
D)  Municipal bonds 
E)  Mortgage bonds

Question 18

An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every 6 months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should she pay for it? (Round the answer to two decimal places.)

Accepted Answer

A)  $1,122.87 
B)  $1,003.42 
C)  $875.38 
D)  $950.75 
E)  $812.15 
A)  $1,122.87 
B)  $1,003.42 
C)  $875.38 
D)  $950.75 
E)  $812.15

Question 19

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond? (Round the answer to two decimal places.)

Accepted Answer

A)  The present value of the bond at 8 percent is $508.34. 
B)  The present value of the bond at 7 percent is $463.19. 
C)  The maturity value of the bond at 8 percent is $508.34. 
D)  The maturity value of the bond at 7 percent is $508.34. 
E)  The present value of the bond at 7 percent is $508.34. 
A)  The present value of the bond at 8 percent is $508.34. 
B)  The present value of the bond at 7 percent is $463.19. 
C)  The maturity value of the bond at 8 percent is $508.34. 
D)  The maturity value of the bond at 7 percent is $508.34. 
E)  The present value of the bond at 7 percent is $508.34.

As junk bonds are such high-risk instruments, the returns on such bonds aren't very high.

Which of the following ratings by Standard & Poor's (S&P) indicates speculative bonds?

An increase in interest rates will increase the future value of a portfolio because the cash flows produced by the portfolio:

A debt is said to be selling at par when:

Federal funds represent:

The _____ of a bond fluctuates continuously during its life.

The conversion feature of a bond permits:

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.

The Securities and Exchange Commission is required to verify that:

The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the bondholders will:

Which of the following is true of a traditional certificate of deposit (CD)?

The sinking fund provision requires a firm to:

The principal value of debt:

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

Which of the following types of bonds protects a bondholder against increases in interest rates?

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond? (Round the answer to two decimal places.)

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

As junk bonds are such high-risk instruments, the returns on such bonds aren't very high.

Which of the following ratings by Standard & Poor's (S&P) indicates speculative bonds?

An increase in interest rates will increase the future value of a portfolio because the cash flows produced by the portfolio:

A debt is said to be selling at par when:

Federal funds represent:

The _____ of a bond fluctuates continuously during its life.

The conversion feature of a bond permits:

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.

The Securities and Exchange Commission is required to verify that:

The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the bondholders will:

Which of the following is true of a traditional certificate of deposit (CD)?

The sinking fund provision requires a firm to:

The principal value of debt:

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

Which of the following types of bonds protects a bondholder against increases in interest rates?

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond? (Round the answer to two decimal places.)

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