Question 1

Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation?

Accepted Answer

A)  sinking fund 
B)  call feature 
C)  floating coupon rates 
D)  poison put covenant 
A)  sinking fund 
B)  call feature 
C)  floating coupon rates 
D)  poison put covenant

Question 2

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 3

What is the yield to maturity of a bond with 10 years to maturity, and a coupon of 15%? The current price of this bond is $1,109. Assume interest is paid annually.

Accepted Answer

A)  12.0% 
B)  12.5% 
C)  13.0% 
D)  13.5% 
A)  12.0% 
B)  12.5% 
C)  13.0% 
D)  13.5%

Question 4

There are various types of government debt securities. Which of the following is considered a long term government debt instrument?

Accepted Answer

A)  Treasury bills 
B)  Treasury notes 
C)  Commercial paper 
D)  Debentures 
A)  Treasury bills 
B)  Treasury notes 
C)  Commercial paper 
D)  Debentures

Question 5

Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield-to-maturity (to the nearest tenth of one percent).

Accepted Answer

A)  13.2% 
B)  5.6% 
C)  13.7% 
D)  12.0% 
A)  13.2% 
B)  5.6% 
C)  13.7% 
D)  12.0%

Question 6

____ are not secured by specific assets.

Accepted Answer

A)  Equipment trust certificates 
B)  Mortgage bonds 
C)  Debentures 
D)  Collateral trust bonds 
A)  Equipment trust certificates 
B)  Mortgage bonds 
C)  Debentures 
D)  Collateral trust bonds

Question 7

There is a(n) ____ relationship between the value of a bond and its required rate of return.

Accepted Answer

A)  direct 
B)  distant 
C)  inverse 
D)  turgid 
A)  direct 
B)  distant 
C)  inverse 
D)  turgid

Question 8

What is a "payment-in-kind" bond and why is it considered a "weak security"?

Accepted Answer

PIK bonds allow a cash-strapped company

Question 9

The ____ represents the debtholders in dealings with the issuing company.

Accepted Answer

A)  trustee 
B)  stakeholders 
C)  broker 
D)  investment banker 
A)  trustee 
B)  stakeholders 
C)  broker 
D)  investment banker

Question 10

A WPI 10s 08 bond closed at 89. What is the current yield on this bond?

Accepted Answer

A)  10.10% 
B)  11.35% 
C)  10.73% 
D)  11.24% 
A)  10.10% 
B)  11.35% 
C)  10.73% 
D)  11.24%

Question 11

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 12

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 13

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 14

Preferred stock has a priority over common stock with regard to the company's

Accepted Answer

A)  assets 
B)  voting rights 
C)  dividends 
D)  assets and dividends 
A)  assets 
B)  voting rights 
C)  dividends 
D)  assets and dividends

Question 15

Up in Smoke Tobacco Shops' bond carries a 9 percent coupon, pays interest semiannually, and has 10 years to maturity. What is the bond's yield to maturity if the bond is selling for $937.75 (rounded to the nearest whole percent)?

Accepted Answer

A)  8.0% 
B)  10.0% 
C)  9.0% 
D)  7.0% 
A)  8.0% 
B)  10.0% 
C)  9.0% 
D)  7.0%

Question 16

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

Question 17

What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?

Accepted Answer

A)  $250.00 
B)  $362.31 
C)  $335.62 
D)  $1000.00 
A)  $250.00 
B)  $362.31 
C)  $335.62 
D)  $1000.00

Question 18

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

Question 19

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually, has 12 years to maturity, and sells for $871.50?

Accepted Answer

A)  11.3% 
B)  11.5% 
C)  11.8% 
D)  12.1% 
A)  11.3% 
B)  11.5% 
C)  11.8% 
D)  12.1%

Question 20

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.

Accepted Answer

A)  $1,170. 
B)  $999 
C)  $1,095 
D)  $1,173 
A)  $1,170. 
B)  $999 
C)  $1,095 
D)  $1,173

Exam 6: Fixed Income Securities: Characteristics and Valuation

Which of the following features (if any) of debt securities provides the investor with a measure of protection against inflation?

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?

What is the yield to maturity of a bond with 10 years to maturity, and a coupon of 15%? The current price of this bond is $1,109. Assume interest is paid annually.

There are various types of government debt securities. Which of the following is considered a long term government debt instrument?

Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield-to-maturity (to the nearest tenth of one percent).

____ are not secured by specific assets.

There is a(n) ____ relationship between the value of a bond and its required rate of return.

What is a "payment-in-kind" bond and why is it considered a "weak security"?

The ____ represents the debtholders in dealings with the issuing company.

A WPI 10s 08 bond closed at 89. What is the current yield on this bond?

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.

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%?

Preferred stock has a priority over common stock with regard to the company's

Up in Smoke Tobacco Shops' bond carries a 9 percent coupon, pays interest semiannually, and has 10 years to maturity. What is the bond's yield to maturity if the bond is selling for $937.75 (rounded to the nearest whole percent)?

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.

What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?

The call feature of a long-term bond

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually, has 12 years to maturity, and sells for $871.50?

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.

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

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

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

Filters