Question 1

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 2

The principal disadvantage of preferred stock financing is

Accepted Answer

A)  its high after-tax cost as compared with long-term debt 
B)  the decrease in the firm's degree of financial leverage 
C)  the required payment of dividends 
D)  the reduction in control 
A)  its high after-tax cost as compared with long-term debt 
B)  the decrease in the firm's degree of financial leverage 
C)  the required payment of dividends 
D)  the reduction in control

Question 3

Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.

Accepted Answer

A)  $65.79 
B)  $49.37 
C)  $75.00 
D)  $114.00 
A)  $65.79 
B)  $49.37 
C)  $75.00 
D)  $114.00

Question 4

What is the market value of a zero coupon bond with 5 years to maturity? The bond was originally sold with a yield to maturity equal to 11 percent, but the market rate today is 9 percent.

Accepted Answer

A)  $593 
B)  $650 
C)  $621 
D)  $577 
A)  $593 
B)  $650 
C)  $621 
D)  $577

Question 5

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

Accepted Answer

Advantages:
1. The firm has a relatively

Question 6

There are consequences associated with not paying interest to bondholders. Which of the following apply? I. Not paying an interest payment automatically puts the company in default making the entire loan due.
II) Interest on debt is not required to be paid, but the corporation generally pays it for public relations reasons.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 7

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 8

If an Allied Chemical zero coupon bond due in 12 years is selling for $420.00, what is its yield to maturity?

Accepted Answer

A)  7.50% 
B)  4.64% 
C)  6.51% 
D)  5.26% 
A)  7.50% 
B)  4.64% 
C)  6.51% 
D)  5.26%

Question 9

Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000 par value) that is currently selling for $521.

Accepted Answer

A)  6.0% 
B)  11.5% 
C)  7.9% 
D)  8.5% 
A)  6.0% 
B)  11.5% 
C)  7.9% 
D)  8.5%

Question 10

WXAM has an outstanding bond issue with a coupon rate of 6 1/8%, and a current yield of 6.9%. The yield to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and has 12 years to maturity?

Accepted Answer

A)  $883.42 
B)  $937.45 
C)  $943.65 
D)  $1000.00 
A)  $883.42 
B)  $937.45 
C)  $943.65 
D)  $1000.00

Question 11

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 12

What is the value of an Orion bond that has a 10 percent coupon, pays interest semiannually, and has 10 years to maturity, if the required rate of return is 12 percent?

Accepted Answer

A)  $1,200 
B)  $885.50 
C)  $895.27 
D)  $1,000 
A)  $1,200 
B)  $885.50 
C)  $895.27 
D)  $1,000

Question 13

Explain a sinking fund.

Accepted Answer

Lenders require that the borrowing compa

Question 14

Which of the following statements is/are correct about long-term loans?
I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds.
II. The quality of a debenture depends on the general creditworthiness of the issuing company.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 15

____ 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 16

When the required rate of return is ____ the coupon rate, the bond will sell at a discount.

Accepted Answer

A)  less than 
B)  greater than 
C)  the same as 
D)  equal to 
A)  less than 
B)  greater than 
C)  the same as 
D)  equal to

Question 17

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 18

A zero coupon bond is an example of a(n) ____.

Accepted Answer

A)  fixed income security 
B)  original issue deep discount bond 
C)  tax-exempt bond 
D)  fixed income security and an original issue deep discount bond 
A)  fixed income security 
B)  original issue deep discount bond 
C)  tax-exempt bond 
D)  fixed income security and an original issue deep discount bond

Question 19

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 20

Which of the following types of debt securities protect investors against interest rate risk?

Accepted Answer

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

Exam 6: Fixed Income Securities: Characteristics and Valuation

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?

The principal disadvantage of preferred stock financing is

Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.

What is the market value of a zero coupon bond with 5 years to maturity? The bond was originally sold with a yield to maturity equal to 11 percent, but the market rate today is 9 percent.

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

A sinking fund allows the issuer to

If an Allied Chemical zero coupon bond due in 12 years is selling for $420.00, what is its yield to maturity?

Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000 par value) that is currently selling for $521.

WXAM has an outstanding bond issue with a coupon rate of 6 1/8%, and a current yield of 6.9%. The yield to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and has 12 years to maturity?

Which of the following is the highest risk debt issue?

What is the value of an Orion bond that has a 10 percent coupon, pays interest semiannually, and has 10 years to maturity, if the required rate of return is 12 percent?

Explain a sinking fund.

Which of the following statements is/are correct about long-term loans? I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds. II. The quality of a debenture depends on the general creditworthiness of the issuing company.

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

When the required rate of return is ____ the coupon rate, the bond will sell at a discount.

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.

A zero coupon bond is an example of a(n) ____.

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

Which of the following types of debt securities protect investors against interest rate risk?

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

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