Corporate Finance Exam 2 – Pt. 2

1) Speculative, or non-investment-grade, bonds have an S&P bond rating ofA) C or less.B) CCC or less.C) BB or less.D) BBB or less. C
2) 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. b
3) 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. a
4) Market efficiency implies which of the following?A) book value = intrinsic valueB) market value = intrinsic valueC) book value = market valueD) liquidation value = book value b
5) When the intrinsic value of an asset exceeds the market valueA) the asset is undervalued to the investor.B) the asset is overvalued to the investor.C) market value and intrinsic value are always the same; therefore, this could not happen.D) liquidation value must be higher than book value. a
6) The present value of the expected future cash flows of an asset represents the asset’sA) liquidation value.B) book value.C) intrinsic value.D) par value. C
7) The yield to maturity on a bond is the rate of return that equates the present value of the bond’s future cash flows with the bond’s A) face value.B) market value.C) liquidation value.D) book value. b
8) If the market price of a bond decreases, thenA) the yield to maturity decreases.B) the coupon rate increases.C) the yield to maturity increases.D) the coupon rate decreases. c
9) 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 atA) 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. c
10) A bond will sell at a premium (above par value) ifA) 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. b
11) If market interest rates riseA) 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. c
12) 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 toA) 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. b

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