Finance Chapter 6

Generally, an increase in risk will result in ____________. a higher required return or interest rate
The legal contract setting forth the terms and provisions of a corporate bond is a(n)_________. indenture
_____________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. Real
The current yield on a bond is measured by​ ________. the annual interest payment divided by the current price
In the basic valuation​ model, risk is generally incorporated into the​ ________. discount rate
A​ $1,000, 8% bond sells for 980.​ $1,000 is called the​ ________. par value
To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will​ default, the lender typically​ ________. charges a higher interest rate on long-term loans
The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to​ ________. ensure a cash shortage does not cause an inability to meet current obligations
Nominal rate of interest is equal to​ ________. the risk-free rate plus a risk premium
​A(n) ________ is a paid​ individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture. trustee
Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4​ percent, then​ Nico’s ________. nominal return on investment is more than 15 percent
Tangshan Industries has issued a bond which has a​ $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for​ $1,250. Using this​ information, the yield to maturity on the Tangshan Industries bond is​ ________. 10.79%
Less certain a cash​ flow, the​ ________ the​ risk, and​ ________ the present value of the cash flow. higher;lower
The value of a bond is the present value of the​ ________. interest payments and maturity value
What is the yield to​ maturity, to the nearest​ percent, for the following​ bond: current price is​ $908, coupon rate is 11​ percent, $1,000 par​ value, interest paid​ annually, eight years to​ maturity? 13%
Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the​ issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This​ firm’s bonds are currently selling for​ $1,091.96. If interest is paid annually for both​ bonds, what must the coupon rate of the new bonds be in order for the issue to sell at​ par? 6.71%
The riskiness of publicly traded bond issues is rated by independent agencies. According to​ Moody’s rating​ system, an Aaa bond and a Caa bond are​ ________ and​ ________ respectively. prime quality; speculative
A firm has an issue of​ $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8​ percent, the​ firm’s bond will sell for​ ________ today. 1,268.4
What is the current price of a​ $1,000 par value bond maturing in 9 years with a coupon rate of 8​ percent, paid​ annually, that has a YTM of 9​ percent? $940
A bond will sell​ ________ when the stated rate of interest exceeds the required rate of​ return, ________ when the stated rate of interest is less than the required​ return, and​ ________ when the stated rate of interest is equal to the required return. at a​ premium; at a​ discount; equal to the par value
The​ risk-free rate on​ T-bills recently was 4.32​%. If the real rate of interest is estimated to be 0.82​%, what was the expected level of​ inflation? The expected level of inflation IP is 3.50​%.
A debenture is​ ________. an unsecured bond that only creditworthy firms can issue
The return expected from an asset is fully defined by its​ ________. cash flow and timing
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called​ ________. inverted yield curve

Leave a Reply

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