Finance- Chapter 6

The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.A) indentureB) debentureC) loan documentD) promissory note A
A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________.A) common stockB) corporate bondC) indentureD) preferred stock B
A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture.A) trusteeB) investment bankerC) bond issuerD) bond rating agency A
A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity.A) redemption clauseB) sinking-fund requirementC) conversion featureD) subordination clause B
Bond indentures include restrictive covenants.These provisions protect the bondholders against ________.A) increase in inflation rateB) increase in borrower’s riskC) decrease in liquidity riskD) maturity risk B
Which of the following is a restrictive covenant?A) to maintain satisfactory accounting recordsB) to pay the taxes dueC) to supply audited financial statementsD) to impose fixed asset restrictions D
The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investment alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm C
The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investments alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) limit the annual cash dividends paid by the firm B
The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________.A) protect the lender by controlling the risk and marketability of the borrower’s security investment alternativesB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) prevent the firm from liquidation and ensure its ability to repay the debt D
The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________.A) assure the lender that additional borrowing is constrainedB) limit the amount of fixed-payment obligationsC) limit the realization of current assets to cashD) limit the payment of annual cash dividends C
The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________.A) maintain a minimum level of liquidityB) limit the amount of fixed-payment obligationsC) ensure a long-run cash shortage does not cause an inability to meet current obligationsD) protect the original lender in the priority of claims during liquidation D
________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.A) Security interestB) SubordinationC) Sinking fund requirementD) Bond indenture B
The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.A) assure the lender that additional borrowing is constrained or may be subordinated to the original loanB) limit the amount of fixed-payment obligationsC) ensure a cash shortage does not cause an inability to meet current obligationsD) avoid default of payments to bondholders D
An example of a standard debt provision is to ________.A) limit the corporation’s annual cash dividend paymentsB) pay taxes and other liabilities when dueC) restrict the corporation from disposing of fixed assetsD) maintain a minimum level of liquidity B
The cost of a long-term debt generally ________ that of a short-term debt.A) is less thanB) is equal toC) is greater thanD) is less than or equal to C
Which of the following affects the cost of a bond?A) maturity of a bondB) dividend policyC) fixed assets purchased from the proceeds of bond issueD) money market regulations A
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 ________.A) charges a higher interest rate on long-term loansB) reserves the right to change the terms of the loan at any timeC) includes excessively restrictive debt provisionsD) reserves the right to demand immediate payment at any time A
The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________.A) not relatedB) inversely relatedC) independentD) perfectly positively correlated B
The ________ in the capital market is the basis for determining a bond’s coupon interest rate. A) cost of moneyB) weighted average cost of capitalC) bond’s face valueD) average coupon interest rate A
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.A) callB) conversionC) putD) swap A
The ________ feature allows bondholders to change each bond into stated number of shares of stock.A) callB) conversionC) putD) swap B
________ allow bondholders to purchase a certain number of shares of the firm’s common stock at a specified price over a certain period of time.A) Call optionsB) Stock purchase warrantsC) DebenturesD) Put options B
A ________ give bondholders the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of time.A) stock purchase warrantB) call featureC) swapD) conversion feature A
Stock purchase warrants are instruments that give their holders ________.A) the obligation to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of timeB) the right to purchase a certain number of shares of the issuer’s common stock at a specified price over a certain period of timeC) the obligation to sell a certain number of shares of the issuer’s preferred stock at a specified price over a certain period of timeD) the right to sell a certain number of shares of the issuer’s preferred stock at a specified price over a certain period of time B
A $1,000, 8% bond sells for 980. $1,000 is called the ________.A) current valueB) market valueC) par valueD) auction value C
The current yield on a bond is measured by ________.A) the annual interest payment divided by the current priceB) the annual interest payment divided by the par valueC) the annual interest payment divided by the maturity valueD) the annual interest payment divided by the yield to maturity A
A bond rated Aaa according to Moody’s, is considered ________.A) a high grade bondB) a prime quality bondC) an upper medium grade bondD) a medium grade bond B
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.A) speculative; investment gradeB) prime quality; medium gradeC) prime quality; speculativeD) medium grade; lowest grade C
A(n) ________ gives purchasers inflation protection.A) zero-coupon bondB) junk bondC) floating rate bondD) income bond C
________ is used to finance “rolling stock”-airplanes,trucks,boats,railroad cars.A) Income bondsB) Equipment trust certificatesC) Collateral trust bondsD) Subordinated debentures B
Deeply discounted bond that pays no coupon interest is a ________.A) junk bondB) floating rate bondC) zero coupon bondD) subordinated debenture C
Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates.A) junk bondsB) floating rate bondsC) extendible notesD) putable bonds B
________ are popular vehicle used to finance mergers and takeovers.A) Income bondsB) Junk bondsC) Floating rate bondsD) Convertible debentures B
A(n) ________ is secured by real estate.A) income bondB) debentureC) mortgage bondD) subordinated debenture C
A(n) ________ is issued with no or very low coupon and sells significantly below its par value.A) income bondB) zero or low coupon bondC) mortgage bondD) subordinated debenture B
On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates.A) a floating rate bondB) a zero coupon bondC) a mortgage bondD) an equipment trust certificate A
________ are commonly issued in the reorganization of a failed or failing firm.A) Floating rate bondsB) Income bondsC) Mortgage bondsD) Equipment trust certificates B
________ bonds are characterized by interest payments that are required only when earnings are available.A) Floating rateB) IncomeC) MortgageD) Junk B
________ are debt rated Ba or lower by Moody’s or BB or lower by Standard & Poor’s and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers.A) Subordinated debenturesB) Mortgage bondsC) Junk bondsD) Equipment trust certificates C
Convertible bonds are normally ________.A) debenturesB) income bondsC) zero coupon bondsD) mortgage bonds A
A debenture is ________.A) a bond secured by specific assets that any firm can issueB) a secured bond that is secured by unspecified assetsC) a secured bond issued by startup firmsD) an unsecured bond that only creditworthy firms can issue D
________ are secured by stock and/or bonds that are owned by the issuer.A) Mortgage bondsB) Equipment trust certificatesC) Collateral trust bondsD) Subordinated debentures C
______ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders.A) Floating rate bondsB) Extendible notesC) Putable bondsD) Junk bonds B
Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________.A) floating rate bondB) income bondC) mortgage bondD) equipment trust certificate B
A putable bond gives the bondholder ________.A) the right to sell the bond back to the corporation at a discountB) the right to sell the bond back to the corporation at a stated premiumC) the right to redeem the bond back to the corporation at the current market valueD) the right to redeem the bond back to the corporation at par D
A significant portion of the return on a zero coupon bond is in the form of ________.A) interest and gain in valueB) interestC) gain in valueD) tax reduction C
When issuing a(n) ________ the issuer can annually deduct the current year’s interest accrual without having to actually pay the interest until the bond matures.A) junk bondB) zero coupon bondC) floating rate bondD) extendible note B
High-risk, high-yield junk bonds have declined in popularity over time due to ________.A) the decline in mergers and takeovers, which these bonds were used to financeB) the declining need of growth capitalC) the stabilizing of interest ratesD) a number of major defaults on these bonds D
________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied.A) Convertible debenturesB) Subordinated debenturesC) Mortgage bondsD) Collateral trust bonds B
Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called ________.A) zero coupon bondsB) junk bondsC) floating-rate bondsD) putable bonds D
The decision to refund a callable bond ________.A) should be made only if interest rates have increasedB) is a net working capital decisionC) is a capital budgeting decisionD) is an investing decision C
A foreign bond is issued by a(n) ________.A) foreign corporation or government and is denominated in the investor’s home currency and sold in the investor’s home marketB) corporation or government and is denominated in the investor’s foreign currency and sold in the foreign marketC) international borrower and sold to investors in countries with currencies other than the local currencyD) international borrower and sold to investors in countries with currencies in which the bond is denominated A
The process that links risk and return in order to determine the worth of an asset is termed ________.A) securitizationB) valuationC) discountingD) compounding B
The return expected from an asset is fully defined by its ________.A) risk and cash flowB) cash flow and timingC) discount rateD) beta B
The key inputs to the valuation process include ________.A) returns and riskB) cash flow, cash flow timing, and riskC) cash flows and discount rateD) returns, discount rate, and risk B
Less certain a cash flow, the ________ the risk, and ________ the present value of the cash flow.A) lower; higherB) lower; lowerC) higher; lowerD) higher; higher C
The value of any asset is the ________.A) sum of all future cash flows it is expected to provide over the relevant time periodB) sum of the present values of all future cash flows it is expected to provide over the relevant time periodC) present value of the sum of all future cash flows it is expected to provide over the relevant time periodD) sum of all compounded future cash flows it is expected to provide over the relevant time period B
In the basic valuation model, risk is generally incorporated into the ________.A) cash flowsB) timingC) discount rateD) total value C
Corporate bonds have a ________.A) face value of $5,000B) market price of $1,000C) specified coupon rate paid annuallyD) par value of $1,000 D
Bonds are ________.A) a series of perpetual short-term debt instrumentsB) a form of equity financing that pays interestC) long-term debt instruments used to raise large sums of moneyD) a hybrid form of financing used to raise large sums of money from a diverse group of lenders C
A type of long-term financing used by both corporations and government entities is ________.A) common stocksB) bondsC) preferred stocksD) retained earnings B
The value of a bond is the present value of the ________.A) dividends and maturity valueB) interest and dividend paymentsC) maturity valueD) interest payments and maturity value D
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.A) $1,000B) $805.20C) $1,115.50D) $1,268.40 D
The value of a bond is the present value of its interest payments plus ________.A) future value of its par valueB) present value of its par valueC) its face valueD) present value of interest payment B
Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that ________.A) there is no difference in priceB) the price of F is greater than HC) the price of H is greater than FD) he needs more information before determining the prices A
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm’s bond will sell for ________ today.A) $1,000B) $716.67C) $840.73D) $1,123.33 C
Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.A) $656.82B) $835.45C) $845.66D) $2,201.08 A
Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?A) $11,212B) $12,393C) $15,505D) $18,880 C
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?A) 5.78%B) 6.88%C) 6.50%D) 6.71% D
If the coupon rate of a bond is equal to its required rate of return, then ________.A) the current value is not equal to par valueB) the current value is equal to par valueC) the maturity value is equal to par valueD) the current value is equal to maturity value B
Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.A) par; premiumB) discount; parC) discount; premiumD) coupon; premium C
The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________.A) perfect positive correlationB) constantC) directD) inverse D
When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________.A) remain at parB) increaseC) decreaseD) change depending on whether it is a discount or premium bond A
Interest rate risk and the time to maturity have a relationship that is best characterized as ________.A) constantB) varyingC) directD) inverse C
If the required return is less than the coupon rate, a bond will sell at ________.A) parB) a discountC) a premiumD) book value C
When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________.A) remain constantB) increaseC) decreaseD) approach par D
If the required return is greater than the coupon rate, a bond will sell at ________.A) parB) a discountC) a premiumD) book value B
BC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________.A) bond D will have a greater change in priceB) bond E will have a greater change in priceC) the price of the bonds will be constantD) the percentage price change for the bonds will be equal B
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.A) $791.00B) $1,000C) $1,052.24D) $1,113.00 D
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.A) at a premium; at a discount; equal to the par valueB) at a premium; equal to the par value; at a discountC) at a discount; at a premium; equal to the par valueD) equal to the par value; at a premium; at a discount A
If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will ________.A) equal the face valueB) be less than the face valueC) be greater than the face valueD) be greater than or less than the face value depending on how interest rates vary A
For an investor who plans to purchase a bond maturing in one year, the primary consideration should be ________.A) retained earningsB) face valueC) yield to maturityD) net income C
Yield to maturity on a bond with price equal to its par value will ________.A) be less than the coupon rateB) be more than the coupon rateC) always be equal to the coupon rateD) be less than or equal to the coupon rate depending on the required return C
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?A) $700B) $945C) $940D) $1,062 C
What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?A) 8.5 percentB) 9.3 percentC) 12.0 percentD) 13.2 percent B
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 ________.A) 10.79 percentB) 11.39 percentC) 12.19 percentD) 13.29 percent A
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?A) 11 percentB) 12 percentC) 13 percentD) 14 percent C
What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?A) $604B) $1,090C) $1,060D) $1,073 C
Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?A) 12.00%B) 13.99%C) 14.54%D) 15.25% C

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