Question 1

A trustee is a paid party representing the bond issuer in the bond indenture.

Accepted Answer

A) True 
 B)False

Question 2

Draw a graph of a typical Treasury yield curve and discuss why it usually takes that shape.

Accepted Answer

The student should draw a normal, upward

Question 3

There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.

Accepted Answer

A) True 
 B)False

Question 4

The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.

Accepted Answer

A)  assure the lender that additional borrowing is constrained or may be subordinated to the original loan 
B)  limit the amount of fixed-payment obligations 
C)  ensure a cash shortage does not cause an inability to meet current obligations 
D)  avoid default of payments to bondholders 
A)  assure the lender that additional borrowing is constrained or may be subordinated to the original loan 
B)  limit the amount of fixed-payment obligations 
C)  ensure a cash shortage does not cause an inability to meet current obligations 
D)  avoid default of payments to bondholders

Question 5

Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

Accepted Answer

A)  12.00% 
B)  13.99% 
C)  14.54% 
D)  15.25% 
A)  12.00% 
B)  13.99% 
C)  14.54% 
D)  15.25%

Question 6

A call premium is the amount by which the call price exceeds the market price of the bond.

Accepted Answer

A) True 
 B)False

Question 7

Longer the maturity of a Treasury security, the smaller the interest rate risk.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is a restrictive covenant?

Accepted Answer

A)  to maintain satisfactory accounting records 
B)  to pay the taxes due 
C)  to supply audited financial statements 
D)  to impose fixed asset restrictions 
A)  to maintain satisfactory accounting records 
B)  to pay the taxes due 
C)  to supply audited financial statements 
D)  to impose fixed asset restrictions

Question 9

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

Accepted Answer

A) True 
 B)False

Question 10

In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

Accepted Answer

A) True 
 B)False

Question 11

Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.

Accepted Answer

A) True 
 B)False

Question 12

The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.

Accepted Answer

A) True 
 B)False

Question 13

IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.

Accepted Answer

A) True 
 B)False

Question 14

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

Accepted Answer

Coupon payment = 1,000 × 0.10 = $100
1)

Question 15

The term structure of interest rates is the relationship between ________.

Accepted Answer

A)  the present value of principal and coupon rate of the bonds 
B)  the general expectation of inflation and nominal rate of return for bonds 
C)  the general expectation of inflation and real rate of return for bonds 
D)  the maturity and rate of return for bonds with similar level of risk 
A)  the present value of principal and coupon rate of the bonds 
B)  the general expectation of inflation and nominal rate of return for bonds 
C)  the general expectation of inflation and real rate of return for bonds 
D)  the maturity and rate of return for bonds with similar level of risk

Question 16

Stock purchase warrants are instruments that give their holders ________.

Accepted Answer

A)  the obligation to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time 
B)  the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time 
C)  the obligation to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time 
D)  the right to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time 
A)  the obligation to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time 
B)  the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time 
C)  the obligation to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time 
D)  the right to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time

Question 17

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

Accepted Answer

A) True 
 B)False

Question 18

The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.

Accepted Answer

A)  protect the lender by controlling the risk and marketability of the borrower's security investment alternatives 
B)  limit the amount of fixed-payment obligations 
C)  ensure a cash shortage does not cause an inability to meet current obligations 
D)  limit the annual cash dividends paid by the firm 
A)  protect the lender by controlling the risk and marketability of the borrower's security investment alternatives 
B)  limit the amount of fixed-payment obligations 
C)  ensure a cash shortage does not cause an inability to meet current obligations 
D)  limit the annual cash dividends paid by the firm

Question 19

A(n) ________ gives purchasers inflation protection.

Accepted Answer

A)  zero-coupon bond 
B)  junk bond 
C)  floating rate bond 
D)  income bond 
A)  zero-coupon bond 
B)  junk bond 
C)  floating rate bond 
D)  income bond

Question 20

Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.

Accepted Answer

A) True 
 B)False

A trustee is a paid party representing the bond issuer in the bond indenture.

Draw a graph of a typical Treasury yield curve and discuss why it usually takes that shape.

There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.

The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.

Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

A call premium is the amount by which the call price exceeds the market price of the bond.

Longer the maturity of a Treasury security, the smaller the interest rate risk.

Which of the following is a restrictive covenant?

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.

The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.

IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

The term structure of interest rates is the relationship between ________.

Stock purchase warrants are instruments that give their holders ________.

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.

A(n) ________ gives purchasers inflation protection.

Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 6: Interest Rates and Bond Valuation

A trustee is a paid party representing the bond issuer in the bond indenture.

Draw a graph of a typical Treasury yield curve and discuss why it usually takes that shape.

There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.

The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.

Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

A call premium is the amount by which the call price exceeds the market price of the bond.

Longer the maturity of a Treasury security, the smaller the interest rate risk.

Which of the following is a restrictive covenant?

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.

Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.

The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.

IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

The term structure of interest rates is the relationship between ________.

Stock purchase warrants are instruments that give their holders ________.

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.

A(n) ________ gives purchasers inflation protection.

Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters