FIN3403 FINANCIAL MANAGEMENT

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 plot below cross the

Plot Above - The distance between the U.S. Treasury yield curve and the corporate bond yield curve represents the default risk premium since U.S. Treasuries are considered risk free. This default risk premium is also known as the default spread.

Which of the following is one of the top two bond rating firms? U.S. Corporate Yields Standard and Poor's New York Bond Ratings

Standard and Poor's

A bond will sell at __________ if the required return is greater than the coupon rate. a premium a discount par value

a discount If they buy at a discount, they will receive the coupon payments and also earn some return on the increase in value the bond will experience as it approaches maturity. If the bond is selling at a premium, the reverse will occur. The investor will still receive the coupon payment, but will now lose money on the bond's value as it moves toward maturity and par value.

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

a subordinated debenture

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

bond

Default risk is the risk that: bond coupon rates will change over the life of the bond. bond interest payments or the principal payment will not be made. the market rate of interest will change during the life of the bond.

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

The present value of a bond's __________ determines the value of the bond. dividend payment and maturity value coupon payment and dividend payment coupon payment and maturity value

coupon payment and maturity value

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

decrease

Investors, analysts and managers often use the yield curve to: time the purchase of common stock forecast stock prices forecast interest rates speculate on currency movements

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: the AAA corporate bond rate the prime rate short-term U.S. Treasuries

short-term U.S. Treasuries

Subordinated debentures are: unsecured bonds with a junior claim on assets bonds with no interest payments during their life bonds with real property as collateral

unsecured bonds with a junior claim on assets

A steeply upward-sloping yield curve indicates that: The real rate of return is low. There is a negative real interest rate. Interest rates are expected to rise in the future. The real rate of interest is relatively high.

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? 11.1% 7.5% 10.0% 12.5%

7.5%

Strong Corporation has issued $1,000 par value, 20 year, 8% bonds paying semi-annual interest. If the market rate of interest for bonds of similar risk is 6%, what is the current market price of the bonds? $1,231 $1,149 $802 $956

$1,231

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%? $1,000.00 $620.92 $500.00 $1,211.32

$620.92 PV = 1000/(1+0.10)^5 = 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? $1,060.00 $849.01 $1,111.26 $1,000.00

$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? 10.41% 5.27% 8.33%.

8.33%.

Risky Corporation's bonds are currently selling for $650 and bear a 5% coupon rate and $1,000 par value. If the bonds pay annual interest and have 12 years to maturity, what is the yield to maturity? 10.2% 6.5% 2.5% 5.0%

10.2%

All other things equal, a corporation will pay a __________ coupon rate on __________ bonds. lower, higher risk higher, lower risk higher, higher risk

higher, higher risk

Interest rate risk ______ as the time to maturity for a bond increases. decreases increases remains constant

increases

The term structure of interest rates refers to the different: interest rates of securities with the same risk but different maturity dates risk levels of market rates of interest interest rates of securities with the same maturity dates terms of agreement associated with a bond's interest payments

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

The top four categories of bond ratings are collectively known as __________. speculative bonds investment grade bonds junk bonds

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: market segmentation theory liquidity preference theory pure expectations theory

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 pure expectations theory liquidity preference theory

market segmentation theory

The __________ is a graphical representation of the term structure of interest rates. time line yield curve opportunity cost line real interest rate curve

yield curve