Question 1

What is the most important difference between a corporate bond and an equivalent U.S. Treasury bond?

Accepted Answer

A) Corporate cash flow is relatively smooth, whereas U.S. government revenue is more variable. 
B) Corporate bonds are traded on the floor of the New York Stock Exchange, and Treasury bonds trade in the over-the-counter market. 
C) In the case of corporate bonds, firms have sometimes defaulted, whereas the U.S. government has not. 
D) The beta of corporate bonds is usually less than the beta of a U.S. Treasury bond.

Question 2

An analyst predicts that at the 95 percent confidence level a bank could lose 7 percent of its asset value. Given assets of $30 million, what is the value at risk?

Accepted Answer

A) $2.1 million 
B) $27.9 million 
C) $28.5 million 
D) $30 million

Question 3

The Z-score model was developed by Altman using

Accepted Answer

A) multiple discriminant analyses. 
B) real options analysis. 
C) hazard analysis. 
D) None of the options are correct.

Question 4

Briefly explain how the option pricing model can be used for pricing risky debt.

Accepted Answer

The answer of Briefly explain how the option pricing model...

Question 5

What is a major drawback to value-at-risk calculations?

Accepted Answer

The answer of What is a major drawback to value-at-risk...

Question 6

The value of a government guarantee of a bond equals the value of a put option on the firm's assets.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following rated bonds has the least risk?

Accepted Answer

A) AAA 
B) AA 
C) A 
D) BBB

Question 8

The interest rate on a one-year risk-free bond is 5 percent. BAC Company issued a 5 percent coupon bond with a face value of $1,000, maturing in one year. If the bond is considered risk-free, what is the price of the bond?

Accepted Answer

A) $1,050 
B) $1,000 
C) $985 
D) $950

Question 9

Briefly explain how governmental loan guarantees can be valued using the option pricing model.

Accepted Answer

The answer of Briefly explain how governmental loan guarantees can...

Question 10

Which of the following rated bonds has the most risk?

Accepted Answer

A) Aaa 
B) Aa 
C) Baa 
D) Ba

Question 11

In 2012, the Greek government strong-armed private investors into replacing their existing bonds with new securities worth what percentage of their original bonds?

Accepted Answer

A) 30 percent 
B) 40 percent 
C) 50 percent 
D) 60 percent

Question 12

The median total debt ratio (Total debt/(total debt + equity in %)for industrial firms with an A rating is

Accepted Answer

A) 12.4 percent. 
B) 28.3 percent. 
C) 37.5 percent. 
D) 38.6 percent.

Question 13

A corporate bond matures in one year. The bond promises a coupon of $50 and principal of $1,000 at maturity. If the bond has a 10 percent probability of default and payment under default is $400, calculate the expected payment from the bond.

Accepted Answer

A) $1,050 
B) $400 
C) $985 
D) $1,000

Question 14

Floating-rate bonds have adjustable coupons to protect investors against changes in interest rates. The rates paid may be limited by

Accepted Answer

A) the put provisions of the issue. 
B) a floor rate that sets the minimum. 
C) a cap rate that sets the maximum. 
D) both a floor rate that sets the minimum and a cap rate that sets the maximum.

Question 15

During the period 1983-2012, the percentage of bonds that were rated AAA and remained AAA was

Accepted Answer

A) 86.48 percent. 
B) 85.94 percent. 
C) 87.29 percent. 
D) 84.55 percent.

Question 16

The U.S. federal government has guaranteed loans to the following industries:
I.housing;
II.airlines;
III.ship owners and shipyards;
IV.steel companies;
V.oil and gas companies

Accepted Answer

A) I only 
B) I and II only 
C) I, II, III, and IV only 
D) I, II, III, IV, and V

Question 17

Beaver, McNichols, and Rhie have developed the following model to predict the chance of failing during the next year relative to the chance of not failing for firms: log(relative chance of failure)= -6.445 - 1.192 ROA + 2.307 (liabilities/assets)- 0.346 (EBITDA/liabilities), using

Accepted Answer

A) multiple discriminant analyses. 
B) real options analysis. 
C) hazard analysis. 
D) None of the options are correct.

Question 18

It is extremely rare for a corporate bond to have a higher expected yield than a government bond.

Accepted Answer

A) True 
 B)False

Question 19

Suppose that the possibility of default on a firm's bond is totally unrelated to other events in the economy. In this case, the beta of the bond will equal zero and the discount rate will equal the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 20

Briefly explain the term junk bonds.

Accepted Answer

The answer of Briefly explain the term junk bonds....

Exam 23: Credit Risk and the Value of Corporate Debt

What is the most important difference between a corporate bond and an equivalent U.S. Treasury bond?

An analyst predicts that at the 95 percent confidence level a bank could lose 7 percent of its asset value. Given assets of $30 million, what is the value at risk?

The Z-score model was developed by Altman using

Briefly explain how the option pricing model can be used for pricing risky debt.

What is a major drawback to value-at-risk calculations?

The value of a government guarantee of a bond equals the value of a put option on the firm's assets.

Which of the following rated bonds has the least risk?

The interest rate on a one-year risk-free bond is 5 percent. BAC Company issued a 5 percent coupon bond with a face value of $1,000, maturing in one year. If the bond is considered risk-free, what is the price of the bond?

Briefly explain how governmental loan guarantees can be valued using the option pricing model.

Which of the following rated bonds has the most risk?

In 2012, the Greek government strong-armed private investors into replacing their existing bonds with new securities worth what percentage of their original bonds?

The median total debt ratio (Total debt/(total debt + equity in %) for industrial firms with an A rating is

A corporate bond matures in one year. The bond promises a coupon of $50 and principal of $1,000 at maturity. If the bond has a 10 percent probability of default and payment under default is $400, calculate the expected payment from the bond.

Floating-rate bonds have adjustable coupons to protect investors against changes in interest rates. The rates paid may be limited by

During the period 1983-2012, the percentage of bonds that were rated AAA and remained AAA was

The U.S. federal government has guaranteed loans to the following industries: I.housing; II.airlines; III.ship owners and shipyards; IV.steel companies; V.oil and gas companies

Beaver, McNichols, and Rhie have developed the following model to predict the chance of failing during the next year relative to the chance of not failing for firms: log(relative chance of failure) = -6.445 - 1.192 ROA + 2.307 (liabilities/assets) - 0.346 (EBITDA/liabilities) , using

It is extremely rare for a corporate bond to have a higher expected yield than a government bond.

Suppose that the possibility of default on a firm's bond is totally unrelated to other events in the economy. In this case, the beta of the bond will equal zero and the discount rate will equal the risk-free rate.

Briefly explain the term junk bonds.