Question 1

When the market for an asset is in equilibrium, the expected rate of return on the asset is equal to the:

Accepted Answer

A)  risk-free rate 
B)  marginal investor's required rate of return 
C)  historical cost of capital 
D)  perpetual capitalization rate 
A)  risk-free rate 
B)  marginal investor's required rate of return 
C)  historical cost of capital 
D)  perpetual capitalization rate

Question 2

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

Accepted Answer

A)  adjustable dividend rate 
B)  cumulative feature 
C)  call feature 
D)  after-tax cost 
A)  adjustable dividend rate 
B)  cumulative feature 
C)  call feature 
D)  after-tax cost

Question 3

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?

Accepted Answer

A)  8.3% 
B)  16.1% 
C)  16.6% 
D)  14.3% 
A)  8.3% 
B)  16.1% 
C)  16.6% 
D)  14.3%

Question 4

What is the value of a $1000 par value Consul perpetual bond with a 6 percent coupon rate if the required rate of return is 9 percent?

Accepted Answer

A)  $1,000 
B)  $666.67 
C)  $333.33 
D)  $540 
A)  $1,000 
B)  $666.67 
C)  $333.33 
D)  $540

Question 5

Determine the yield-to-call (to nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of $140, and is currently selling for $1154.

Accepted Answer

A)  12.0% 
B)  16.2% 
C)  13.7% 
D)  14% 
A)  12.0% 
B)  16.2% 
C)  13.7% 
D)  14%

Question 6

Junk bonds (i.e., bonds issued by companies with weak financial positions) 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

Original issue deep discount bonds have decreased in popularity over the last several years due to:

Accepted Answer

A)  changes in tax laws 
B)  issuance by brokerage firms of lower risk substitutes 
C)  increased interest in equity securities 
D)  changes in tax laws and issuance by brokerage firms of lower risk substitutes 
A)  changes in tax laws 
B)  issuance by brokerage firms of lower risk substitutes 
C)  increased interest in equity securities 
D)  changes in tax laws and issuance by brokerage firms of lower risk substitutes

Question 8

What is the required rate of return to the investor who is willing to purchase a Duke Power preferred stock with a $8.70 dividend, a par value of $100, and a current market price of $87?

Accepted Answer

A)  10.7% 
B)  8.7% 
C)  9.4% 
D)  10.0% 
A)  10.7% 
B)  8.7% 
C)  9.4% 
D)  10.0%

Question 9

A Treasury bill with a July 11th maturity date is quoted today at 8.46 bid and 8.40 asked. How much would you pay today (January 11th) for one bill?

Accepted Answer

A)  $9,577 
B)  $9,580 
C)  $9,588 
D)  $8,400 
A)  $9,577 
B)  $9,580 
C)  $9,588 
D)  $8,400

Question 10

WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10 years to mature?

Accepted Answer

A)  $ 941 
B)  $1021 
C)  $1000 
D)  $ 885 
A)  $ 941 
B)  $1021 
C)  $1000 
D)  $ 885

Question 11

Normally the coupon rates on new bonds

Accepted Answer

A)  do not change over the life of the issue 
B)  are set equal to the market rate plus an inflation premium 
C)  float with changes in the prime rate 
D)  are set just over the prevailing prime rate 
A)  do not change over the life of the issue 
B)  are set equal to the market rate plus an inflation premium 
C)  float with changes in the prime rate 
D)  are set just over the prevailing prime rate

Question 12

The following is a bond quotation from The Wall Street Journal: IBM 10¼ 27 9.8 18 104 ½ -½
If the bond has a face (par) value of $1000, what was the market price?

Accepted Answer

A)  $1025 
B)  $1045 
C)  $950 
D)  $980 
A)  $1025 
B)  $1045 
C)  $950 
D)  $980

Question 13

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 14

List the restrictions that an indenture places on the borrower of long-term debt.

Accepted Answer

1.It thoroughly details the nature of th

Question 15

Treasury notes typically have initial maturities ranging from

Accepted Answer

A)  1 to 3 years 
B)  1 to 5 years 
C)  1 to 10 years 
D)  10 to 30 years 
A)  1 to 3 years 
B)  1 to 5 years 
C)  1 to 10 years 
D)  10 to 30 years

Question 16

An advantage of preferred stock financing is:

Accepted Answer

A)  Preferred stockholders can vote for the Board of Directors and be an integral part of the direction of the company. 
B)  Preferred stock dividends are tax-deductible for the investor. 
C)  Preferred stock dividends are flexible. The penalties for not paying a dividend are not severe. 
D)  Preferred stock is the most preferred method of raising capital. 
A)  Preferred stockholders can vote for the Board of Directors and be an integral part of the direction of the company. 
B)  Preferred stock dividends are tax-deductible for the investor. 
C)  Preferred stock dividends are flexible. The penalties for not paying a dividend are not severe. 
D)  Preferred stock is the most preferred method of raising capital.

Question 17

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 18

The current required rate of return on a bond issued by Who LTD is 11 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?

Accepted Answer

A)  4.00% 
B)  8.00% 
C)  10.68% 
D)  6.05% 
A)  4.00% 
B)  8.00% 
C)  10.68% 
D)  6.05%

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

Question 20

Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.

Accepted Answer

A)  $626 
B)  $463 
C)  $897 
D)  $270 
A)  $626 
B)  $463 
C)  $897 
D)  $270

Exam 6: Fixed Income Securities: Characteristics and Valuation

When the market for an asset is in equilibrium, the expected rate of return on the asset is equal to the:

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

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?

What is the value of a $1000 par value Consul perpetual bond with a 6 percent coupon rate if the required rate of return is 9 percent?

Determine the yield-to-call (to nearest 0.1 of a percent) of an LTV bond with a 14 percent coupon, that pays interest semiannually. The bond can be called in 7 years, has a call premium of $140, and is currently selling for $1154.

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

Original issue deep discount bonds have decreased in popularity over the last several years due to:

What is the required rate of return to the investor who is willing to purchase a Duke Power preferred stock with a $8.70 dividend, a par value of $100, and a current market price of $87?

A Treasury bill with a July 11th maturity date is quoted today at 8.46 bid and 8.40 asked. How much would you pay today (January 11th) for one bill?

WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays interest semi-annually and has 10 years to mature?

Normally the coupon rates on new bonds

The following is a bond quotation from The Wall Street Journal: IBM 10¼ 27 9.8 18 104 ½ -½ If the bond has a face (par) value of $1000, what was the market price?

List the restrictions that an indenture places on the borrower of long-term debt.

Treasury notes typically have initial maturities ranging from

An advantage of preferred stock financing is:

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

The current required rate of return on a bond issued by Who LTD is 11 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?

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

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