Chapter 6 DSM Business Finance HSU Blaylock

The present value of a bond’s __________ determines the value of the bond. coupon payment and maturity value
What is the yield to maturity on a zero coupon bond currently selling for $527.32 that has a $1,000 par value and will mature in 8 years? CORRECT ANSWER:8.33%.
A bond will sell at __________ if the required return is greater than the coupon rate. CORRECT ANSWER:a discount
As market interest rates increase, the value of a bond will __________ all other things equal. CORRECT ANSWER:decreasego to explanation
What is the value of a $1,000 par value 6% coupon bond with 7 years remaining to maturity assuming annual coupon payments and a market rate of 9% on similar risk bonds? CORRECT ANSWER:$849.01
A long-term debt instrument issued by a business or government to raise capital is known as a: CORRECT ANSWER:bond
What is the yield to maturity (YTM) for a $1,000 par value bond selling for $1,100 that matures in 5 years and pays a 10% coupon one time a year?C ORRECT ANSWER:7.5%
What is the market price of a $1,000 face value bond quoted at 97 ½%? CORRECT ANSWER:$975.00
In the event a firm goes bankrupt, an investment grade senior debenture bond is more likely to receive liquidation proceeds than: CORRECT ANSWER:a subordinated debenture
The top four categories of bond ratings are collectively known as __________. CORRECT ANSWER:investment-grade bondsgo to explanation
The top four categories of bond ratings are collectively known as __________. investment-grade bondsgo to explanation
All other things equal, a corporation will pay a __________ coupon rate on __________ bonds. CORRECT ANSWER:higher, higher risk
Investors, analysts and managers often use the yield curve to: CORRECT ANSWER:forecast interest rates
Interest rate risk and the time to maturity have a relationship that is best described as: CORRECT ANSWER:direct
A zero-coupon bond pays no interest payments to the bondholder. It has a $1,000 par value and matures in 5 years. What is the value of this bond if the market rate of interest on similar risk bonds is 10%? CORRECT ANSWER:$620.92
Justin is considering an investment that will pay him $5,000 a year for the next 20 years. Which of the following should Justin use to discount these future cash flows to the present? CORRECT ANSWER:The opportunity cost of capital
The theory that postulates the shape of the yield curve is determined by the fact that investors require an interest premium to compensate them for the risks of holding longer term debt is known as: CORRECT ANSWER:liquidity preference theory
A yield curve can be constructed using similar risk corporate bonds. The yield curves constructed with corporate bonds will __________ the U.S. Treasury yield curve. CORRECT ANSWER:plot above
Credit risk, or default risk, is the risk that: CORRECT ANSWER:Bond interest payments or the principal payment will not be made.
Which of the following is one of the top three bond rating firms? CORRECT ANSWER:Standard and Poor’s
The __________ is a graphical representation of the term structure of interest rates. ORRECT ANSWER:yield curve
The risk-free rate of interest is used in a number of financial models. The best approximation for the risk-free rate is: CORRECT ANSWER:short-term U.S. Treasuries
The theory that postulates the shape of the yield curve is determined by the supply and demand for different maturities of debt is known as: CORRECT ANSWER:market segmentation theory
Subordinated debentures are: CORRECT ANSWER:unsecured bonds with a junior claim on assets
The term structure of interest rates refers to the different: CORRECT ANSWER:interest rates of securities with the same risk but different maturity dates
A steeply upward-sloping yield curve indicates that: CORRECT ANSWER:Interest rates are expected to rise in the future.

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