Business Finance: Quiz 6

The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

$849.54

Bonds are sometimes called ________ securities because they pay fixed amounts on specific future dates.

Fixed Income

Probably assigned to the most senior debt

Highest Rating

The ________ is the written contract between the bond issuer and the bondholder.

Indenture

Phillips Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. Phillips has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?

6.548%

More common than upgrades

Downgrades

One of the interesting names that have been attached to speculative bonds receiving a rating below Baa3 or BBB-

Junk Bonds

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

Long-term debt

There are state bonds, issued by individual states and ________ bonds (sometimes called munis), issued by county, city, and local government agencies.

Municipal

Which of the following types of bonds, as characterized by a feature, by definition never matures?

Perpetuity

Assets that have physical characteristics that produce value are called ________ assets whereas ________ assets derive their value from a legal claim to cash flows.

Real, Financial

According to bond rating agencies, a bond rated 'AAA' has a lower amount of DEFAULT risk than a bond with a 'BBB' rating.

TRUE

Categories of bonds classified by issuer could include municipal bonds, Treasury bonds, and foreign bonds.

TRUE

Not all financial assets have their value stated on the written claim. Some financial assets simply describe the promised future cash flows and the value must be determined.

TRUE

The current yield for a bond is the annual coupon payment divided by the bond price (where bond price refers to the current or market price and not the par value).

TRUE

An indenture is an unsecured bond and most of the bonds sold today in the United States are of this type.

FALSE

Bonds that have a payment schedule tied to the income of the company are called prime rate bonds.

FALSE

If a bond is selling at a premium above the par value, then the current yield to maturity is greater than the coupon rate.

FALSE

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond.

FALSE

The price of a semi-annual bond is greater than the price of an annual bond except when the coupon rate and the yield to maturity are identical.

FALSE

Three methods available for pricing annual-coupon bonds involve (i) the use of a formula, (ii) the TVM keys on a calculator, and (iii) a spreadsheet. However, only two methods are available for pricing a semi-annual coupon bond because there are no allowances for the semi-annual payments when using the bond pricing formula.

FALSE

When the coupon rate is less than the yield to maturity the bond sells for a premium over the par value.

FALSE

Bonds originally issued as investment grade but whose rating has fallen considerably

Fallen Angels