Chapter 6 DSM

Which of the following is one of the top three bond rating firms?

Standards and Poor

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?

The opportunity cost of capital

A bond will sell at __________ if the required return is greater than the coupon rate.

a discount

In the event a firm goes bankrupt, an investment grade senior debenture bond is more likely to receive liquidation proceeds than:

a subordinated debenture

A long-term debt instrument issued by a business or government to raise capital is known as a:

bond

The present value of a bond's __________ determines the value of the bond.

coupon payment and maturity value

As market interest rates increase, the value of a bond will __________ all other things equal.

decrease

Interest rate risk and the time to maturity have a relationship that is best described as:

direct

Investors, analysts and managers often use the yield curve to:

forecast interest rates

The risk-free rate of interest is used in a number of financial models. The best approximation for the risk-free rate is:

short-term U.S. Treasuries

Subordinated debentures are:

unsecured bonds with a junior claim on assets

A steeply upward-sloping yield curve indicates that:

Interest rates are expected to rise in the future.

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?

7.5%

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%?

$620.92

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?

$849.01

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?

8.33%

What is the market price of a $1,000 face value bond quoted at 97 ½%?

$975

Credit risk, or default risk, is the risk that:

Bond interest payments or the principal payment will not be made.

All other things equal, a corporation will pay a __________ coupon rate on __________ bonds

higher, higher risk

The term structure of interest rates refers to the different:

interest rates of securities with the same risk but different maturity dates

The top four categories of bond ratings are collectively known as __________.

investment grade bonds

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:

liquidity preference theory

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:

market segmentation 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.

plot above

The __________ is a graphical representation of the term structure of interest rates.

yield curve