Exam 6: Interest Rates and Bond Valuation

Stock purchase warrants are instruments that give their holder the right to purchase a certain number of shares of the firm's common stock at the market price over a certain period of time.

________ are secured by stock and/or bonds that are owned by the issuer.

As a bond approaches maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity.

________ are popular vehicle used to finance mergers and takeovers.

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.

The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, or 2) the firm's risk has changed.

When issuing a(n) ________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures.

The ________ feature allows bondholders to change each bond into stated number of shares of stock.

Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.

A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity.

The level of risk associated with a given cash flow positively affects its value.

High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.

The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.

A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?

What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?

Floating-rate bonds are bonds that can be redeemed at par at the option of their holder either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.

________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.

The term structure of interest rates is a graphical presentation of the relationship between the maturity and rate of return.

Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest semiannually. (a) How much can the investor expect in annual interest (in dollars)? (b) How much can the investor expect in interest every six months (in dollars)? (c) How much can the investor expect in par value at the end of the 25th year?

The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________.