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Finance
Q:
Market efficiency implies which of the following?
A) book value = intrinsic value
B) market value = intrinsic value
C) book value = market value
D) liquidation value = book value
Q:
If markets were entirely efficient (perfect), which of the following would we conclude?
A) There would be no inflation.
B) Book value would be the same as market value.
C) No firms would ever default on their bonds.
D) Market value and intrinsic value would be the same.
Q:
In an efficient securities market, the market value of a security is equal to
A) its liquidation value.
B) its book value.
C) its intrinsic value.
D) par value.
Q:
Harold considers investing in an LM Corp. bond and decides not to purchase the bond. Which of the following statements is MOST correct?
A) The intrinsic value of the bond for the investor is less than the market value of the bond.
B) The liquidation value of the bond is greater than the market value of the bond.
C) The intrinsic value of the bond for the investor is less than the par value of the bond.
D) The intrinsic value of the bond for the investor is greater than the book value of the bond.
Q:
If a bond has a market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate.
Q:
Liquidation value is of primary importance to investors because it represents the true amount of cash that an investor is likely to receive.
Q:
As market rates of interest rise, investors move their funds into bonds, thus increasing their price and lowering their yield.
Q:
In an efficient market, the market value and intrinsic value of a security should be equal.
Q:
The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.
Q:
Unlike market value, the intrinsic value of an asset is estimated independently of risk.
Q:
How does the bond rating affect an investor's required rate of return? What factors affect a bond's rating?
Q:
What restrictions are typically included in an indenture of bonds in order to protect the bondholder?
Q:
You want to invest in bonds. Explain whether or not each provision listed will make the bonds more or less desirable as an investment: call provision, convertible bond provision, subordinated debt.
Q:
A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B?
A) greater reliance on equity financing
B) high variability in past earnings
C) little use of subordinated debt
D) small firm size
Q:
Speculative, or non-investment-grade, bonds have an S&P bond rating of
A) C or less.
B) CCC or less.
C) BB or less.
D) BBB or less.
Q:
Which of the following is FALSE concerning bonds?
A) The indenture spells out the obligations of the bond issuer.
B) Mortgage bonds are secured by assets such as real estate.
C) Debentures are secured by assets other than real estate.
D) Subordinated debentures are riskier than unsubordinated debentures.
Q:
Which of the following statements concerning bonds and risk is true?
A) Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk.
B) Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money.
C) Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation.
D) B-rated bonds are above average for risk, i.e., less risky than the average bond.
Q:
The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is
A) $101.75.
B) $102.
C) $105.50.
D) $120.0.
Q:
To determine the periodic interest payments that a bond makes, multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year.
Q:
The par value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity.
Q:
Federal regulations make it impossible for rating agencies to drop a company's credit rating more than two notches at a time in order to prevent panic in bond markets.
Q:
A bond rating of "BB" indicates that the company's financial position is above average and hence the default risk on the bonds is very low.
Q:
A firm's bond rating would be favorably affected if they have a low use of financial leverage (debt).
Q:
A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.
Q:
Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.
Q:
In the case of insolvency, the claims of debt are honored prior to those of common stock and after those of preferred stock.
Q:
If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.
Q:
If the demand for a new bond issue increases, it is likely that the coupon rate will be adjusted upward by the issuing company.
Q:
Bonds generally have a maturity date while preferred stocks do not.
Q:
Other things held equal, a bond with a call provision is worth more to investors than a bond without a call provision.
Q:
A company with a AAA bond rating will command a higher interest rate on its bonds than a company with a lesser BBB bond rating.
Q:
Restrictive provisions in bond indenture agreements are designed to protect bondholders and lessen the agency problems between bondholders and stockholders.
Q:
In general, interest on bonds, like dividends on preferred stock, may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers.
Q:
Why would a convertible bond increase much more in value than a bond that is not convertible?
Q:
If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price?
A) the debenture
B) the mortgage bond
C) the subordinated debenture
D) All of the above types of bonds would sell for the same price.
Q:
Which of the following bond provisions will make a bond more desirable to investors, other things being equal?
A) The bond is convertible.
B) The bond is callable.
C) The coupon rate is lower.
D) The bond is subordinated.
Q:
Other things being equal, investors will value which of the following bonds the highest?
A) callable bonds
B) convertible bonds
C) bonds that are both callable and convertible
D) unsecured, callable bonds
Q:
Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim:
A. Subordinated debentures
B. Debentures (unsubordinated)
C. Common Stock
D. Preferred stock
A) C, B, A, D
B) C, D, A, B
C) B, A, C, D
D) D, C, B, A
E) D, C, A, B
Q:
If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid?
A) first
B) second
C) third
D) fourth
Q:
Which of the following is true of a zero coupon bond?
A) The bond makes no coupon payments.
B) The bond sells at a premium prior to maturity.
C) The bond has a zero par value.
D) The bond has no value until the year it matures because there are no positive cash flows until then.
Q:
If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal?
A) the debenture
B) the mortgage bond
C) the subordinated debenture
D) all of the above
Q:
Which of the following statements is true regarding convertible bonds?
A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well.
B) The holder can convert these bonds into an equal number of new bonds if they choose to do so.
C) These bonds are convertible into common stock of the issuing firm at a prespecified price.
D) These bonds have a variable interest rate.
Q:
Which of the following statements concerning junk bonds is MOST correct?
A) A rational investor will always prefer a AAA-rated bond to a junk bond.
B) Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk.
C) Junk bonds may also be called low-yielding securities.
D) Junk bonds are priced higher than AAA-rated bonds because junk bonds are more risky.
Q:
Progressive Corporation issued callable bonds. The bonds are most likely to be called if
A) interest rates decrease.
B) interest rates increase.
C) Progressive Corporation needs additional financing.
D) Progressive Corporation's stock price increases dramatically.
Q:
Debentures are expected to have a lower yield than secured bonds because the debentures are more risky and therefore less desirable.
Q:
A bond is a long-term promissory note issued by the firm.
Q:
A mortgage bond is secured by a lien on real property.
Q:
Convertible bonds are debt securities that can be converted into a firm's stock at a prespecified price.
Q:
Bonds issued in a country different from the one in which the currency of the bond is denominated are called Eurobonds.
Q:
The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.
Q:
Junk bonds are also called high-yield bonds.
Q:
Convertible bonds decrease in value whenever the price of the company's stock increases.
Q:
An example of a Eurobond is a bond issued in Asia by a U.S. Corporation with interest and principal payments made in U.S. dollars.
Q:
Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.
Q:
Why does a bond sell at a discount when the coupon rate is lower than the required rate of return and vice versa?
Q:
Define interest rate risk. How does a bond's level of interest rate risk depend on its maturity?
Q:
If market interest rates decline,
A) short-term bonds will decline in value more than long-term bonds.
B) short-term bonds will rise in value more than long-term bonds.
C) long-term bonds will decline in value more than short-term bonds.
D) long-term bonds will rise in value more than short-term bonds.
Q:
If market interest rates rise
A) short-term bonds will decline in value more than long-term bonds.
B) short-term bonds will rise in value more than long-term bonds.
C) long-term bonds will decline in value more than short-term bonds.
D) long-term bonds will rise in value more than short-term bonds.
Q:
Which of the following statements is true?
A) The value of a bond is inversely related to changes in investors' present required rate of return.
B) If interest rates decrease, the value of a bond will decrease.
C) If interest rates increase, the value of a bond will increase.
D) If interest rates remain constant, the value of premium bonds will increase over time.
Q:
Which of the following statements is true?
A) Short-term bonds have greater interest rate risk than do long-term bonds.
B) Long-term bonds have greater interest rate risk than do short-term bonds.
C) All bonds have equal interest rate risk.
D) Interest rate risk is highest during periods of high interest rates.
Q:
Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time period would be to
A) invest in long-term bonds to reduce interest rate risk.
B) invest in short-term bonds to reduce interest rate risk.
C) buy only junk bonds which have higher interest rates.
D) invest in long-term bonds to lock in a bond position for when interest rates increase in the future.
Q:
A bond will sell at a discount (below par value) if
A) the market value of the bond is less than the present value of the discount rate of the bond.
B) current market interest rates are moving in the same direction as bond values.
C) investor's current required rate of return is above the coupon rate of the bond.
D) the economy is booming.
Q:
A bond will sell at a premium (above par value) if
A) the market value of the bond is greater than the discount rate of the bond.
B) investor's current required rate of return is below the coupon rate of the bond.
C) current market interest rates are moving in the same direction as bond values.
D) the economy is in a recession.
Q:
The correct relationship for a premium bond is
A) current yield > yield to maturity > coupon rate.
B) current yield > coupon rate > yield to maturity.
C) coupon rate > yield to maturity > current yield.
D) coupon rate > current yield > yield to maturity.
Q:
Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at
A) par value.
B) a premium to par value.
C) a discount to par value.
D) Cannot be determined without knowing the number of years to maturity.
Q:
If a bond is selling below its face value, then its yield to maturity must be less than the bond's coupon rate.
Q:
A bond with a coupon rate of 8% will also have a yield to maturity of 8%.
Q:
If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.
Q:
Bond prices are inversely related to market interest rates.
Q:
The value of a bond is equal to the present value of the bond's interest payments plus the present value of the bond's maturity value, all discounted at the bond's coupon rate.
Q:
A bond that matures in 5 years has less interest rate risk than a bond that matures in 25 years because regardless of changes in interest rates, the bond can be redeemed for face value 20 years earlier.
Q:
A bond selling at a discount will have a built-in capital gain if the bond is held to maturity.
Q:
Long-term bonds have greater interest rate risk than shorter-term bonds.
Q:
Graystone bonds have a maturity value of $1,000. The bonds carry a coupon rate of 12 percent. Interest is paid semiannually. The bonds will mature in nine years. If the current market price is $976.50,a. what is the yield to maturity on the bond?b. what is the current yield on the bond?
Q:
If you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent interest semiannually, what is your expected rate of return?
Q:
Jackson Corp. $1,000 par value bonds currently sell for $752.18. The coupon rate is 7 percent, paid semiannually. If the bonds have 6 years before maturity, what is the yield to maturity on the bonds?
Q:
A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you recommend he buy the bond or not? Explain your answer.
Q:
Two investors are considering the purchase of Corporation LMQ bonds. The bonds are selling at their par value of $1,000 with a coupon rate of 9%. Investor A decides to buy the bonds and Investor B does not buy the bonds.
A) Investor A must have a required return higher than the bond's yield to maturity.
B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
C) Investor B must have required return lower than the bond's yield to maturity.
D) Investor A must have a required return less than or equal to 9%.
Q:
Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to maturity. The bonds pay 7.7% interest on a semiannual basis. The current market price of the bonds is $1,175. What is the yield-to-maturity of the bonds?
A) 6.09%
B) 6.87%
C) 7.24%
D) 8.38%
Q:
Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?InvestmentσA18%20%B20%20%C20%22%A) Investment AB) Investment BC) Investment CD) Cannot be determined without information regarding the risk-free rate of return.