Question 1

Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds?

Accepted Answer

A)  7.8% 
B)  8.7% 
C)  9.2% 
D)  10.2% 
E)  12.9%

Question 2

Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is true about commercial paper?

Accepted Answer

A)  Commercial paper always matures in two months. 
B)  Commercial paper is issued by bankrupt firms. 
C)  Commercial paper pays annual interest. 
D)  Commercial paper is issued at a discount. 
E)  Commercial paper is issued in denominations of $100.

Question 4

When the market value of debt is the same as its face value, it is said to be selling at the:

Accepted Answer

A)  yield value. 
B)  par value. 
C)  discounted value. 
D)  premium value. 
E)  maturity value.

Question 5

The face value of a debt is:

Accepted Answer

A)  the principal value written on the face, or outside cover, of a debt contract. 
B)  always equal to the market value of the debt. 
C)  equal to the principal value minus the interest payments to investors. 
D)  always greater than the maturity value of the debt. 
E)  added to the interest payments to find the maturity value of the debt.

Question 6

Which of the following is generally considered an advantage of term loans over publicly issued bonds?

Accepted Answer

A)  Higher flotation costs 
B)  Speed, or how long it takes to bring the issue to the market 
C)  Fixed bond terms after the bond has been issued 
D)  Regular interest and principal payments on specified dates 
E)  Standard terms of issue requiring no negotiation between the borrowing firm and the financial institution

Question 7

The maturity of commercial paper varies from:

Accepted Answer

A)  six to twelve months. 
B)  one to five months. 
C)  one to nine months. 
D)  five to ten months. 
E)  four to eight months.

Question 8

The principal value generally is written on the outside cover of the debt contract, so it is sometimes called the:

Accepted Answer

A)  maturity value. 
B)  premium value. 
C)  yield value. 
D)  face value. 
E)  discounted value.

Question 9

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following bonds pays interest based on an inflation index?

Accepted Answer

A)  Floating-rate bonds 
B)  Income bonds 
C)  Treasury bills 
D)  Purchasing power bonds 
E)  Zero coupon bonds

Question 11

The terms and conditions of a bond are set forth in its:

Accepted Answer

A)  debenture. 
B)  underwriting agreement. 
C)  indenture. 
D)  restrictive covenants. 
E)  call provision.

Question 12

Foreign debt is debt sold in a country other than the one in whose currency the debt is denominated

Accepted Answer

A) True 
 B)False

Question 13

Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. The annual coupon interest rate is: (Round the answer to the nearest whole number.)

Accepted Answer

A)  8%. 
B)  6%. 
C)  4%. 
D)  2%. 
E)  0%.

Question 14

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm" and the coupon rate is generally set equal to the required rate.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true about a zero coupon bond?

Accepted Answer

A)  A zero coupon bond is taxed as a capital gain at the time the bond matures. 
B)  A zero coupon bond is issued at a substantial discount below its par value. 
C)  A zero coupon bond is issued at a coupon rate that adjusts for inflation. 
D)  The interest received every year on a zero coupon bond is taxed as interest income. 
E)  The discount on the issue of a zero coupon bond is written off over its life in the investor's financial statement.

Question 16

The principal value of debt is:

Accepted Answer

A)  the amount added to interest payments to be repaid at the maturity date. 
B)  the amount owed to the lender. 
C)  the sum of all interest payments during the life of the debt. 
D)  the amount of adjustment in the maturity value of the debt due to interest rate fluctuations. 
E)  the sum of interest and inflation adjusted par value of debt.

Question 17

High-risk, high-yield bonds used to finance mergers, leveraged buyouts, and troubled companies are referred to as:

Accepted Answer

A)  callable bonds. 
B)  junk bonds. 
C)  convertible bonds. 
D)  floating-rate bonds. 
E)  putable bonds.

Question 18

A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

Accepted Answer

A) True 
 B)False

Question 19

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10 percent currently have a yield to maturity (YTM) equal to 8 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at a premium in the financial markets.

Accepted Answer

A) True 
 B)False

Question 20

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

Accepted Answer

A) True 
 B)False

Exam 6: Bonds Debtcharacteristics and Valuation

Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

Which of the following statements is true about commercial paper?

When the market value of debt is the same as its face value, it is said to be selling at the:

The face value of a debt is:

Which of the following is generally considered an advantage of term loans over publicly issued bonds?

The maturity of commercial paper varies from:

The principal value generally is written on the outside cover of the debt contract, so it is sometimes called the:

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

Which of the following bonds pays interest based on an inflation index?

The terms and conditions of a bond are set forth in its:

Foreign debt is debt sold in a country other than the one in whose currency the debt is denominated

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm" and the coupon rate is generally set equal to the required rate.

Which of the following statements is true about a zero coupon bond?

The principal value of debt is:

High-risk, high-yield bonds used to finance mergers, leveraged buyouts, and troubled companies are referred to as:

A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10 percent currently have a yield to maturity (YTM) equal to 8 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at a premium in the financial markets.

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).