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Finance
Q:
When the market value of debt is the same as its par value, it is:
a. refinanced at a lower interest rate.
b. selling at its face value.
c. issued at a premium.
d. repaid at the maturity date.
e. selling at a discount.
Q:
The principal value of a bond generally is written on the outside cover of the debt contract, so it is sometimes called the:
a. maturity value.
b. premium value.
c. yield value.
d. face value.
e. discounted value.
Q:
A debt is said to be selling at par, when the _____ of the debt is equal to the _____.
a. par value; discounted value of the interest payments
b. principal value; discount on the issue of a zero coupon bond
c. face value; premium payment on the exercise of a call provision
d. market value; face value of the debt
e. maturity value; par value of the debt
Q:
When the market value of debt is the same as its face value, it is said to be selling at the:
a. yield value.
b. par value.
c. discounted value.
d. premium value.
e. maturity value.
Q:
A bond's principal value is also referred to as the maturity value because:
a. it is always repaid at a discount prior to the bond's maturity.
b. it is written on the face of the debt contract.
c. it is repaid at the maturity date.
d. it is added to interest payments that are repaid at the maturity date.
e. it is issued at a value below par value to generate a positive capital gain.
Q:
A debt is said to be selling at par when:
a. investors' required rate of return from debt is greater than the coupon rate.
b. the market rate of return is more than the coupon rate of return.
c. the borrower pays the interest at the maturity of the debt.
d. the current market price of the debt is more than the face value of the debt.
e. the market value is equal to the face value of the debt.
Q:
The face value of a debt is:
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.
Q:
The par value of debt:
a. is added to the interest payments to get the maturity value of the debt.
b. must be repaid at some point during the life of the debt.
c. is always half of the maturity value of the debt.
d. is equal to the market value of the debt.
e. always yields positive returns for investors.
Q:
The par value of debt is:
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.
Q:
Which of the following bonds pays interest based on an inflation index?
a. Floating-rate bonds
b. Income bonds
c. Treasury bills
d. Purchasing power bonds
e. Zero coupon bonds
Q:
Which of the following types of investors would be most likely to purchase zero coupon bonds?
a. Retired individuals seeking income for current consumption
b. Individuals in high tax brackets
c. Tax-free institutional investors such as pension funds
d. Risk-averse individuals anticipating increases in interest rates
e. Individuals with no interest income
Q:
Which of the following statements is true about foreign bonds?
a. The interest rate on foreign bonds is adjusted annually for inflation.
b. Foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold.
c. Foreign bonds are bonds sold by a foreign borrower but convertible to bonds issued in the foreign country.
d. The term Eurodebt specifically applies to any foreign bonds denominated in U.S. dollars.
e. The interest rate on foreign bonds is adjusted annually for exchange rate fluctuations.
Q:
Which of the following statements is true about a zero coupon bond?
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.
Q:
Which of the following types of bonds protects a bondholder against increases in interest rates?
a. Floating-rate bonds
b. Income bonds
c. Bonds with call provisions
d. Municipal bonds
e. Mortgage bonds
Q:
_____ bonds are high-risk, high-yield bonds that are often used to finance mergers, leveraged buyouts, and troubled companies.
a. Callable
b. Junk
c. Convertible
d. Floating-rate
e. Putable
Q:
A bond that pays no annual interest but is sold at a discount below its par value is called a:
a. mortgage bond.
b. callable bond.
c. convertible bond.
d. putable bond.
e. zero coupon bond.
Q:
Which of the following events would make it less likely for a company to choose to call its outstanding callable bonds?
a. An increase in interest rates
b. A decrease in interest rates
c. A decrease in the price of outstanding convertible bonds
d. A low call premium
e. A decrease in the call value
Q:
A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n):
a. convertible bond.
b. putable bond.
c. callable bond.
d. debenture.
e. income bond.
Q:
A bond that pays interest only when a firm has sufficient earnings to cover the interest payments is called a(n):
a. callable bond.
b. putable bond.
c. convertible bond.
d. income bond.
e. indexed bond.
Q:
A(n) _____ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion.
a. debenture
b. indenture
c. callable
d. convertible
e. putable
Q:
In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.
a. debenture
b. income bond
c. indenture
d. subordinated debenture
e. mortgage bond
Q:
A debt backed by some form of specific property is known as a:
a. debenture.
b. mortgage bond.
c. subordinated debt.
d. U.S. government bond.
e. general obligation municipal bond.
Q:
A bond differs from a term loan in that:
a. a bond issue is negotiated between a financial institution and an investor.
b. a bond is sold to a financial institution only.
c. a bond is always offered to the public at a variable coupon rate.
d. a bond has a higher issuance cost.
e. a bond involves minimal formal documentation.
Q:
A contract that is negotiated directly between a borrowing firm and a bank and under which the borrower agrees to make a series of interest and principal payments to the bank on specific dates is called:
a. preferred stock.
b. commercial paper.
c. convertible debt.
d. a term loan.
e. a bond issue.
Q:
The terms and conditions of a bond are set forth in its:
a. articles.
b. underwriting agreement.
c. indenture.
d. restrictive covenants.
e. call provision.
Q:
Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.
a. higher than
b. lower than
c. the same as
d. moving with
e. unrelated to
Q:
Which of the following is generally considered an advantage of term loans over corporate bonds?
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
Q:
The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest rates.
a. True
b. False
Q:
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.
a. True
b. False
Q:
If a bond's yield to maturity is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.
a. True
b. False
Q:
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%.
a. True
b. False
Q:
A bond's value will increase when interest rates increase.
a. True
b. False
Q:
Because short-term interest rates are much more volatile than long-term rates, an investor would, in the real world, be subject to much more interest rate price risk if he or she purchased a 30-day bond than if he or she bought a 30-year bond.
a. True
b. False
Q:
Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall.
a. True
b. False
Q:
A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.)
a. True
b. False
Q:
If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.
a. True
b. False
Q:
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).
a. True
b. False
Q:
If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and effectively refinance its debt at a lower rate.
a. True
b. False
Q:
Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest rates. They affect the actual maturity of the bond but not its price.
a. True
b. False
Q:
The financial pages of the local newspaper helped Mary in identifying that she can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, the annual interest payments equal $80.
a. True
b. False
Q:
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 firm's required rate.
a. True
b. False
Q:
Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise.
a. True
b. False
Q:
One of the disadvantages of issuing a zero coupon bond is that any tax shield associated with the bond's price appreciation cannot be claimed until the bond matures.
a. True
b. False
Q:
Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.
a. True
b. False
Q:
Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock.
a. True
b. False
Q:
Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located.
a. True
b. False
Q:
Unlike bonds issued in the United States, which are bearer bonds, Eurobonds are typically issued as registered bonds.
a. True
b. False
Q:
Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States.
a. True
b. False
Q:
Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated.
a. True
b. False
Q:
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.
a. True
b. False
Q:
In general, long-term unsecured debts have lower interest rates (costs) than long-term secured debts for a particular firm.
a. True
b. False
Q:
LIBOR is the acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations.
a. True
b. False
Q:
As junk bonds are high-risk instruments, the returns on such bonds are not very high.
a. True
b. False
Q:
Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI).
a. True
b. False
Q:
Zero coupon bonds are offered at substantial discounts below their par values.
a. True
b. False
Q:
A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.
a. True
b. False
Q:
Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.
a. True
b. False
Q:
The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the bondholders will:
a. receive a lower market value for the bond.
b. receive a higher principal at the maturity of the bond.
c. call back the bond before its maturity.
d. earn a lower return on the reinvested cash flows.
e. receive a lower coupon interest than mentioned in the bond indenture.
Q:
An increase in interest rates will help increase the future value of a portfolio because the cash flows produced by the portfolio:
a. will increase the maturity value of the bond.
b. can be reinvested at higher rates of return.
c. can be used to recall high-rate bonds.
d. will generate cash to pay future coupon interest.
e. will decrease the yield to maturity of the bond.
Q:
The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called:
a. interest rate price risk.
b. market yield risk.
c. interest rate reinvestment risk.
d. capital gain yield risk.
e. yield to maturity risk.
Q:
If interest rates decline, bondholders will earn:
a. a lower rate of return on reinvested cash flows.
b. a higher current yield.
c. no capital gain on the bond's maturity.
d. a lower coupon interest on the bond.
e. a higher maturity value on the maturity date.
Q:
Which of the following equations is used to compute the percentage rate of return on a bond?
a. Percentage rate of return on a bond = Current yield + Coupon rate of interest
b. Percentage rate of return on a bond = Current yield + Capital gains yield
c. Percentage rate of return on a bond = Market return + Maturity value
d. Percentage rate of return on a bond = Market yield + Current yield
e. Percentage rate of return on a bond = Market yield + Capital gains yield
Q:
All else being equal, an increase in the yield to maturity of a bond will result in:
a. an increase in the market price of the bond.
b. a greater interest rate price risk on a long-term bond than on a short-term bond.
c. an increase in the maturity value of the bond.
d. a decrease in the rate of return at which the cash flows from the portfolios can be reinvested.
e. a lower risk of suffering losses in the market values of the bond portfolios.
Q:
If a bond's yield to maturity exceeds its coupon rate, the bond's:
a. current yield is equal to the coupon rate.
b. price must be less than its par value.
c. maturity value is more than its face value.
d. current yield is equal to the capital gain on the maturity of the bond.
e. maturity value is less than the bond's market value.
Q:
The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?
a. The value of the bond at 8 percent is $385.54.
b. The value of the bond at 10 percent is $463.19.
c. The maturity value of the bond at 8 percent is $508.34.
d. The maturity value of the bond at 7 percent is $508.34.
e. The value of the bond at 7 percent is $508.34.
Q:
Assuming other things are held constant, which of the following is correct?
a. The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods.
b. For a bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital gain than the capital loss stemming from an identical decrease in the interest rate.
c. For any given maturity, a percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical increase in the interest rate.
d. In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds.
e. A 20-year bond has more interest rate reinvestment risk than a two-year bond.
Q:
Stephanie purchased a corporate bond that matures in three years. The bond has a coupon interest rate of 9 percent and its yield to maturity is 6 percent. If market interest rates remain constant and Stephanie sells the bond in 12 months, her capital gain from holding the bond will be:
a. positive because she purchased the bond at a discount and the bond price will approach its face value as it nears its maturity.
b. negative because she purchased the bond at a discount and the bond price will approach its face value as it nears its maturity.
c. positive because she purchased the bond at a premium and the bond price will approach its market price as it nears its maturity.
d. negative because she purchased the bond at a premium and the bond price will approach its face value as it nears its maturity.
e. positive because she purchased the bond at a discount and the bond price will approach its market price as it nears its maturity.
Q:
In general, when rates in the financial markets increase, the prices (values) of financial assets decrease.
a. True
b. False
Q:
The value of an asset is the future value of the cash flows that the asset is expected to generate during its life.
a. True
b. False
Q:
A deficit trade balance hinders the Federal Reserve's ability to lower interest rates when combatting a recession.
a. True
b. False
Q:
Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up.
a. True
b. False
Q:
Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.
a. True
b. False
Q:
During or near peaks of business activity, yield curves generally are either flat or downward sloping.
a. True
b. False
Q:
If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will generally be greater than the increase in rates in the long-term market.
a. True
b. False
Q:
The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.
a. True
b. False
Q:
The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
a. True
b. False
Q:
The real rate of interest is composed of a risk-free rate of interest plus the default risk premium and liquidity premium that reflects the riskiness of the security.
a. True
b. False
Q:
Bonds with higher liquidity must offer higher interest rates in the market, because such investments can be easily converted into cash on short notice at or near the amounts originally invested.
a. True
b. False
Q:
Inflation leads to an increase in the purchasing power of investors.
a. True
b. False
Q:
The higher the perceived risk associated with an investment, the higher its required rate of return.
a. True
b. False