Chapter 8, Corporate Finance
The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.
True
U.S. Treasury securities are the best proxy measure for the risk-free rate.
True
Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity.
True
If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:
at a price equal to its face value.
A bond will sell at a premium when its coupon interest rate:
exceeds the market interest rate on similar bonds.
Bonds sell at a discount when the market rate of interest is:
greater than the bond's coupon rate.
In regard to interest rate risk, short-term bonds:
have less interest rate risk than longer-term bonds.
A corporate bond's coupon rate is the annual coupon payment divided by:
the bond's face value
The value, or price, of any asset is the present value of its future cash flows
True
As interest rates fall, the prices of bonds decline.
False
Bonds with a call provision pay lower yields than comparable noncallable bonds.
False
Higher coupon bonds have greater interest rate risk.
False
Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.
False
The yield to maturity of a bond never changes.
False
Upward-sloping yield curves often occur before the beginning of recession.
False
Zero coupon bonds sell well above their par value because they offer no coupons.
False
Which of the following statements is true of convertible bonds?
Firms that issue convertible bonds can do so at a lower interest rate
The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity.
True
The risk that the lender may not receive payments as promised is called default risk.
True
All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.
True
Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.
True
Corporate bonds have a thin market relative to market for corporate stocks.
True
The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions.
True
Which of the following statements is true of zero coupon bonds?
Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. All of the above are true.