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Finance Flashcards

Finance Final Ch. 7 (Terms, not equation based)

True An Example of a Eurobond is a bond issued by Asia by a U.S. corporation with interest and principal payments made in U.S. dollars. (True or False)
A) These bonds are convertible into common stock of the issuing firm at a prespecified price. Which is true of convertible bonds?A) These bonds are convertible into common stock of the issuing firm at a prespecified price.B) The holder has the right to sell these bonds back to the issuer if the bonds don’t perform well.C) The holder can convert these bonds into an equal number of new bonds if they choose to do so.D) These bonds have a variable interest rate.
B) The bond makes no coupon payments Which is true of a zero coupon bond?A) The bond sells at a premium prior to maturityB) The bond makes no coupon paymentsC) The bond has a zero par valueD) The bond has no value until the year it matures because there are no positive cash flows until then.
Mortgage bonds would be paid first If a Firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claims paid:
C) The bond is convertible Which of the following bond provisions will make a bond more desirable to investors, other things equal?A)The coupon rate is lowerB) The bond is callableC) The bond is convertibleD) The bond is subordinated
C) Bonds are generally less risky than common stock because of the preferences for debt over equity in the event of bankruptcy and liquidation. Which of the following statements concerning bonds and risk is true?A) B-rated bonds are above average for risk, i.e. less risky than the average bondB) Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of moneyC) Bonds are generally less risky than common stock because of the preferences for debt over equity in the event of bankruptcy and liquidationD) Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk.
B) Intrinsic Value The present value of the expected future cash flows of an asset represents the asset’s_____A) Book valueB) Intrinsic ValueC) Liquidation ValueD) Par Value
D) BB or less Speculative, or non-investment grade bonds have an S&P bond rating of:A) CCC or lessB) BBB or lessC) C or lessD) BB or less
The value of both bonds will increase. Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then:
C) Sum of the present value of the bond’s interest payments and the present value of the principal. Finance theory suggest that the current market value of a bond is based upon which of the following?A) The future value of interest paid on a bondB) The present value of a bond’s par value plus the future value of the bond’s present valueC) The sum of the present value of the bond’s interest payments and the present value of the principal.D) The sum total of principle and interest paid on a bond.
I,II,III, IV Which of the following affect an assets’s value to an investor?I: Amount of an asset’s expected cash flowII: The riskiness of the cash flowsIII: Timing of an assets cash flowsIV: Investor’s required rate of return
D) Book Value Which type of value is shown on the firm’s balance sheet?A) Liquidation ValueB) Intrinsic ValueC) Market ValueD) Book Value
D) Long term bonds have greater interest rate risk than do short term bonds Which of the following statements is true?A) Interest rate risk is highest during periods of high interest ratesB) Short-term bonds have greater interest rate risk than do long-term bondsC) All bonds have equal interest rate risk.D) Long-term bonds have greater interest rate risk than do short-term bonds
Long-term bonds will decline in value more than short-term bonds. If market interest rates rise:
True. The yield to maturity is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond. (True or False)
A) The bond with the lower coupon rate will have the lower current yield. While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond. Based on this information you know that:A) The bond with the lower coupon rate will have the lower current yieldB) The bond with the longest time to maturity will have the highest yield to maturity.C) Both bonds will have the same bond ratingD) Both bonds will have the same yield to maturity.
Is equal to the current yield if the bond is selling for face value. The yield to maturity on long-term bonds:
B) The longer maturity bond has a greater premium Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than their yield to maturity. Which of the following is true when comparing the bonds?A) The longer maturity bond has a smaller premiumB) The longer maturity bond has a greater premiumC) The longer maturity bond has a greater discountD) The longer maturity bond has a smaller discount
C) discount to par value 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 at: A) Par valueB) premium to par valueC) discount to par valueD) Cannot be determined w/out knowing # of years to maturity
D) Coupon rate > current yield > yield to maturity The correct relationship for a premium bond is:A) Current yield > coupon rate> yield to maturityB) current yield > yield to maturity > coupon rateC) coupon rate > yield to maturity > current yieldD) Coupon rate > current yield > yield to maturity
Type of long term promissory note, issued by a borrower, promising to its holder, a predetermined and fixed amount of interest per year and repayment of principal at maturity. Bond
Name the Types of Bonds(There are 5) 1) Debentures2) Subordinated Debentures3) Mortgage Bonds4) Eurobonds5) Convertible Bonds
Unsecured Long term debtBenefit: no property has to be secured Debentures
hierarchy of payout in case of solvency Subordinated Debentures
Subordinated would have highest return If a corporation were to choose between issuing a debenture, a mortgage bond, or subordinated debenture, which would have the highest yield to maturity?
True Subordinated debentures are more risky than unsubordinated because the claims of subordinated debenture holders are less likely to be honored in the event of a liquidation. (True or False)
Common Stock, Preferred Stock, Subordinated debenture, Unsubordinated debentureIn the case of solvency, claim on assets goes first to claims of debt (debentures) before those of shareholders. Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim:A) subordinated debentures B) unsubordinated debentures C) common stock D) preferred Stock
True To determine the periodic interest payments that a bond makes, multiply the bond’s stated coupon rate by its par value and divide by the number of coupon payments per year.True or False?
The legal agreement between the firm issuing the bond and the trustee who represents the bondholders. Indenture
gives corporation the option to redeem the bonds before the maturity date. Call Provision
True The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.True or False?
D) market value = intrinsic value Market efficiency implies which of the following?A) Liquidation value = book valueB) book value = market valueC) book value = intrinsic valueD) market value = intrinsic value
True, The investor’s willingness to bear risk could cause different valuations. In an efficient market, two investors may agree on the amount and timing of a bond’s expected cash flows and also on the bond’s risk level, as measured by its debt rating, and still determine two different values for the bond: True or False?
A)An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures Zevo Corp. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1000, and matures in 10 years. Which of the following is most correct?A) An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it maturesB) An investor who purchases the bond today will earn a return of 7% if he sells the bond after one yearC) An investor who purchases the bond today will earn a return of 10% if he sells the bond after a yearD) An investor who purchases the bond today will earn a return of 17% per year if he holds the bond until it matures.
True A bond selling at a discount will have a built in capital gain if the bond is held to maturity: True or false?

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