Corporate Finance Test 3

Chapter 7
Which type of bonds have the least default risk? Treasury bonds– have no default risk, because, if needed, the US Treasury can always print more money to repay its debt. However, Treasury prices fall when interest rates rise (which happen if the US Treasury simply repaid debt by printing money). Thus, Treasury bonds are not completely risk-less, because they can face some interest rate risk.
“In July 2009 Hungary successfully issued 1 million euros in bonds. The transaction was managed by Citigroup.” These are government bonds.The issuer of the bonds are the Hungarian government
A bond’s coupon payment refers to the interest payment or payments paid by a bond
A bond issuer is said to be in default: if it does not pay the interest or the principal in accordance with the term of the indenture agreement or if it violates one or more of the issue’s restrictive covenants.
Sinking Fund Provision a bond contract feature that requires the issuer to retire a specified portion of the bond issue each year
A bond’s call provision: gives the issuer the right to call, or redeem, a bond a specific times and under specific considerations. Most call provisions require the issuer to pay the bondholders an amount greater than the bond’s par value.
Zero-Coupon Bond if the price of the bond is initially discounted and offers no coupon payments
Convertible Provision Bondholders may elect to convert their bonds into shares of common stock at some future date.
Put Provision Gives the investor the right to sell their bonds back to the issuer under specified terms
Bonds that offer interest rates that increase with an increase in the inflation rate Indexed Bonds
When the bond’s coupon rate is equal to the bondholders required return, the bond’s intrinsic value will _____ its par value, and the bond will trade at _____. equal; par
When the bond’s coupon rate is greater to the bondholder’s required return, the bond’s intrinsic value will _____ its par value and the bond will trade at a ______. exceed; premium
When the bond’s coupon rate is less than the bondholder’s required return, the bond’s intrinsic value will be _____ than is par value, and the bond will trade at a ______. less; discount
Yield to Maturity (YTM) the rate of return expected from a bond held until its maturity date.
YTM assumes: the bond will not be called
Debentures are traded in the bond markets based on investors’ belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields.
A rating agency has downgraded a bond’s rating The yield on the bond is likely to increase and the bond’s price will decrease.
Chapter 8
A portfolio consisting of about 30 randomly selected stocks: will have the smallest standard deviation
Portfolio risk will _______ if more stocks that are negatively correlated with other stocks are added to the portfolio decline
Standard Deviation measures stand-alone risk
Beta (market risk) measures a stock’s contribution to the risk of a well-diversified portfolio. Measures the risk of a given security relative to the overall market, which is considered to be a large, diversified risk.

Leave a Reply

Your email address will not be published. Required fields are marked *