Test bank corporate finance 8e ros chap007

par; less than SECTION: 7.1 TOPIC: BOND PRICES AND YIELDS TYPE: CONCEPTS... SECTION: 7.1 TOPIC: BOND PRICES TYPE: CONCEPTS... As the time to maturity increases, interest rate risk: a..

Multiple Choice Questions

7. An indenture is: 

a. the annual amount which a bond issuer agrees to pay as interest on the debt

b. the written record of the original and all subsequent holders of each individual bond comprising a debt issue

c. a bond which is past its maturity date but has yet to be repaid

d. a bond which is secured by the fixed assets which are owned by the bond issuer

E. the written agreement between the bond issuer and the bondholders which details the terms

of the debt issue

b. collateral payment account.

c. deed in trust account

d. call provision account

13. An agreement giving the bond issuer the option to repurchase the bond at a specified priceprior to maturity is the _ provision. 

15. A deferred call provision refers to the: 

a. requirement that a bond issuer pay the current market price should they decide to call a bond

b. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt

c. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior

19. The price a dealer is willing to pay for a security is called the: 

d. changes in the market rate of interest.

e. both inflation and interest rate risk

SECTION: 7.6

TOPIC: REAL RATES

TYPE: DEFINITIONS

25. Interest rates that have not been adjusted for inflation are called _ rates. 

26. The relationship between nominal rates, real rates, and inflation is known as the: 

a. Miller and Modigliani theorem

B. Fisher effect.

c. Gordon growth model

d. term structure of interest rates

e. interest rate risk premium

29. The interest rate risk premium is the: 

a. additional compensation paid to investors to offset rising prices

B. compensation investors demand for accepting interest rate risk.

c. difference between the yield to maturity and the current yield

d. difference between the market interest rate and the coupon rate

e. difference between the coupon rate and the current yield

a. market interest rates

b. comparable corporate bond yields

c. the risk-free rate

31. The _ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer. 

32. The taxability premium compensates investors when a bond: 

a. yield decreases in response to market changes

b. pays no coupon payments

c. defaults

D. has an unfavorable tax status.

e. pays tax-free income

33. The liquidity premium is compensation to investors for: 

a. purchasing a bond in the secondary market

B. the lack of an active market wherein a bond can be sold for its actual value.

c. acquiring a bond with an unfavorable tax status

d. redeeming a bond prior to maturity

e. purchasing a bond which has defaulted on its coupon payments

SECTION: 7.7

TOPIC: LIQUIDITY PREMIUM

TYPE: DEFINITIONS

34. Which of the following are normal features of a corporate bond?

I quarterly interest payments

II interest-only loan

III level coupon

IV $1,000 par value 

a. I and III only

b. II and IV only

c. I, II, and III only

D. II, III, and IV only

e. I, II, III, IV

a. a premium; less than

b. a premium; equal to

C. a discount; less than

d. a discount; higher than

e. par; less than

SECTION: 7.1

TOPIC: BOND PRICES AND YIELDS

TYPE: CONCEPTS

37. Assume that a fixed, semi-annual coupon bond is outstanding An increase in market interest rates will: 

a. increase the coupon rate of the bond

b. decrease the coupon rate of the bond

c. increase the market price of the bond

D. decrease the market price of the bond.

e. not affect the market price of the bond

38. All else constant, a coupon bond that is selling at a premium, must have: 

a. a coupon rate that is equal to the yield to maturity

b. a market price that is less than par value

c. semi-annual interest payments

D. a yield to maturity that is less than the coupon rate.

e. a coupon rate that is less than the yield to maturity

c. coupon payments plus $1,000

d. face amount minus the present value of the coupon payments

E. face amount plus the present value of the coupon payments.

SECTION: 7.1

TOPIC: BOND PRICES

TYPE: CONCEPTS

40. Which one of the following correctly describes the effect of an increase in a bond's yield

to maturity? 

a. time to maturity increases

b. coupon rate decreases

c. coupon amount increases

d. bond's price increases

E. bond's price decreases

a. The bonds will be sold at a discount

b. The bonds will pay five interest payments of $70 each

c. The bonds will sell at a premium if the market rate is 7.5 percent

d. The bonds will initially sell for $965 each

E. The final payment will be in the amount of $1,035.

43. Interest rate risk increases as the:

I time to maturity decreases

II time to maturity increases

III coupon rate decreases

IV coupon rate increases. 

a. II only

b. I and III only

c. I and IV only

D. II and III only

e. II and IV only

44. Which one of the following bonds has the greatest interest rate risk? 

a. 3-year; 4 percent coupon

b. 3-year; 6 percent coupon

c. 5-year; 6 percent coupon

d. 7-year; 6 percent coupon

E. 7-year; 4 percent coupon

45. As the time to maturity increases, interest rate risk: 

a. increases at an increasing rate

B. increases at a decreasing rate.

c. increases at a constant rate

d. decreases at an increasing rate

e. decreases at a decreasing rate

SECTION: 7.1

TOPIC: INTEREST RATE RISK

TYPE: CONCEPTS

46. You own a bond that has an 8 percent coupon and matures 8 years from now You purchased this bond at par value when it was originally issued If the current market rate for this type and quality of bond is 8.25 percent, then you would expect: 

a. the yield to maturity on your bond to be 8.12 percent today

b. the current yield to maturity to be 8 percent

C. to realize a capital loss if you sold the bond at the market price today.

d. next semi-annual interest payment to be $41.25

e. the current yield today to be less than 8 percent

a. short-term; low coupon

b. short-term; high coupon

C. long-term; zero coupon

d. long-term; low coupon

e. long-term; high coupon

49. Which of the following statements concerning bonds are correct?

I Bonds receive more favorable tax treatment than equity securities

II Firms increase their risk of financial failure by issuing bonds

III The repayment of the bond principle is tax-deductible

IV Bondholders have a residual claim on the bond issuer. 

a. II only

B. I and II only

c. III and IV only

d. II and IV only

e. I, II, and III only

II amount of the bond issue

III security description

IV protective covenants 

a. I and II only

b. II and IV only

c. II, III, and IV only

d. I, II, and IV only

E. I, II, III, and IV

51. Which one of the following statements is correct concerning bond classifications? 

a. A debenture is a long-term bond secured by the issuer's inventory

b. A mortgage security is a bond issued solely by a home builder

c. A note is a bond which has an original maturity date of 10 years or more

d. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy

E. A callable bond can be repurchased by the issuer prior to the initial maturity date.

SECTION: 7.2

TOPIC: BOND CLASSIFICATIONS

TYPE: CONCEPTS

52. Callable bonds generally: 

a. grant the bondholder the option to determine if and when the bond should be called

b. are callable at par as soon as the call-protection period ends

c. have a deferred call feature if they have a make-whole call provision

d. are called within the first couple of years after issuance

E. have a call price that decreases as the market rate of interest increases when the bond has a

make-whole call provision

53. Which of the following are negative covenants that might be found in a bond indenture?

I The company shall maintain a current ratio of 1.5 or better

II The company must limit the amount of dividends it pays according to the stated formula.III The company cannot lease any major assets without approval by the lender

IV The company must maintain the loan collateral in good working order. 

a. I and II only

B. II and III only

c. III and IV only

d. II, III, and IV only

e. I, II, and III only

b. generally apply only to government bonds

c. are limited to stating actions which a firm must take

d. only apply to bonds that have a deferred call provision

E. are primarily designed to protect bondholders from future actions of the bond issuer.

SECTION: 7.2

55. Which one of the following statements concerning bond ratings is correct? 

a. Standard and Poor's and Value Line are the primary bond rating agencies

b. Bond ratings assess the default risk and volatility of a bond

C. A crossover bond is rated differently by various rating agencies.

d. Bond ratings evaluate the expected price volatility of a bond issue

e. A "fallen angel" is a split rated bond

56. A "fallen angel" is a bond that: 

a. lowered its annual interest payment

b. has moved from being a long-term obligation to being a short-term obligation

c. has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate

D. has moved from being an investment-grade bond to being a junk bond.

e. is rated as Baa by one rating agency and rated as BBB by another rating agency

57. Bonds issued by the U.S government: 

A. are considered to be free of default risk.

b. are considered to be free of interest rate risk

c. provide totally tax-free income

d. pay interest that is exempt from federal income taxes

e. are zero-coupon bonds

SECTION: 7.4

TOPIC: TREASURY BONDS

TYPE: CONCEPTS

58. Treasury bonds are: 

a. issued by any governmental agency in the U.S

b. issued only on the first day of each fiscal year by the U.S Department of Treasury

c. offer the best tax benefits of any bonds currently available

D. generally issued as semi-annual coupon bonds.

a. have no risk of default

b. generally pay a higher rate of return than corporate bonds

c. are those bonds issued only by local municipalities, such as a city or a borough

D. are generally callable.

e. pay interest that is automatically tax-free at all levels

61. A zero coupon bond: 

a. is sold at a large premium

B. provides a deductible interest expense to the issuer on an annual basis.

c. can only be issued by the U.S Treasury

d. has less interest rate risk than a comparable coupon bond

e. provides no taxable income to the bondholder until the bond matures

B. the face value minus the issue price.

c. the face value minus the market price on the maturity date

d. $1,000 minus the face value

e. $1,000 minus the par value

64. A floating-rate bond: 

a. rarely has an interest rate cap

B. generally has a put provision.

c. has a rate that adjusts on a daily basis

d. usually pays interest based solely on the rate of inflation

e. is a unique security issued strictly by the Canadian government

65. A convertible bond: 

a. must be converted on or before the maturity date

b. grants the holder the option to switch a fixed coupon bond into a floating-rate bond

c. grants the holder the option to switch a floating-rate bond into a fixed rate bond

D. can be exchanged for shares of common stock.

e. generally has a collar

66. "Cat" bonds are primarily designed to help: 

a. cities recover from economic recessions

b. corporations recover from overseas competition

c. the federal government cope with huge deficits

d. animal shelters build facilities to house stray animals

E. insurance companies recover from natural disasters.

SECTION: 7.4

TOPIC: CATASTROPHE BONDS

TYPE: CONCEPTS

67. Investors generally tend to buy: 

a. Treasury bonds for their high coupons

b. municipal bonds for their high coupons

C. convertible bonds for their potential price appreciation.

d. corporate bonds for their tax-free income

e. income bonds for their high fixed-rate cash flows

68. A put bond is a bond that can be: 

a. redeemed at any time by either the issuer or the bondholder

b. exchanged for a stated number of shares of common stock of the bond issuer

c. redeemed prior to maturity at the option of the issuer

D. submitted to the issuer for redemption prior to maturity.

e. redeemed prior to maturity if the bondholder is subjected to a natural disaster

69. A put provision in a bond indenture allows: 

a. a bond issuer to recall the bond after a specified period of time but only at a price that exceeds the face amount

b. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a specified amount

C. the bondholder to force the issuer to buy back the bond at a specified price prior to

maturity

d. the issuer to convert a coupon bond into a zero coupon bond at their discretion

e. the issuer to suspend interest payments for any year in which the interest expense exceeds the net income of the firm

SECTION: 7.4

TOPIC: PUT PROVISION

TYPE: CONCEPTS

70. If you want to sell a bond issued by a smaller corporation, you: 

a. can always do so quite easily by trading it on the New York Stock Exchange

B. may encounter difficulties in executing the trade.

c. can usually do so quite efficiently due to the high liquidity of the bond market

d. can do so quite quickly due to the high volume of trading in the bond markets

e. will only be able to do so if the bond has a put provision

C. difference between the bond's yield and the yield of a particular Treasury issue.

d. difference between the yield to maturity and the coupon rate

e. difference between the yield to call and the yield to maturity

SECTION: 7.5

TOPIC: CORPORATE BOND QUOTE

TYPE: CONCEPTS

73. A U.S Treasury bond that is quoted at 100:05 is selling: 

a. at 5 percent over the face amount

b. at a 5 percent discount

c. at a 5 percent premium

d. at par and pays a 5 percent coupon

E. for about $1.56 over face value.

74. U.S Treasury bonds are: 

a. traded principally on the NSYE

B. traded in the largest securities market in the world.

c. quoted in dollars and cents

d. quoted in eights of a percent

e. rarely traded once they are issued

a. can be sold to a dealer at a price of $1,000.70

b. can be purchased from a dealer at a price of $1,001.56

c. has a spread of 200 basis points

d. is trading at a discount between 5 and 7 percent

E. provides the dealer a profit of $0.625.

SECTION: 7.5

TOPIC: BID VERSUS ASKED PRICES

TYPE: CONCEPTS

76. Today, February 21, you want to buy a bond with a quoted price of 100.42 The bond paysinterest on September 1 and March 1 The price you will pay to purchase this bond is equal to the: 

a. nominal; the same nominal

b. real; the same real

c. nominal; an equivalent inflation

d. real; the identical inflation

E. nominal; an equivalent real

SECTION: 7.6

TOPIC: INFLATION AND PRESENT VALUES

TYPE: CONCEPTS

81. Which of the following statements are correct concerning the term structure of interest rates?

I The outlook for future inflation influences the shape of the term structure of interest rates

II The term structure of interest rates includes only the real rate of return and the inflation premium

III The interest rate risk premium is included in the term structure of interest rates

IV The term structure of interest rates can be downsloping. 

a. I and II only

b. II and IV only

c. III and IV only

D. I, III, and IV only

e. I, II, and IV only

a. interest rate risk and time value of money

b. time value of money and inflation

C. taxes and potential default.

d. taxes and inflation

e. inflation and interest rate risk

SECTION: 7.4 AND 7.7

TOPIC: CORPORATE VERSUS TREASURY BONDS

TYPE: CONCEPTS