FI 400 MCLEOD CHP 6 T/F
A bond will sell at a premium when its required return rises above its coupon interest rate.
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A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
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A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of being exercised (to the benefit of the bondholder) if market interest rates have fallen since the bond was issued
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A call feature is a feature included in all corporate bonds and allows the issuer to repurchase bonds at the market price prior to maturity.
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A call premium is the amount by which the call price exceeds the market price of the bond.
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A company's bonds will experience more trading activity (in terms of the number of bonds traded on a given day) compared to its stock.
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A conversion feature in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have risen since the bond was issued.
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A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
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A flat yield curve indicates generally cheaper long-term borrowing costs than short-term borrowing costs.
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A nominal rate of interest is equal to the sum of the real rate of interest plus the risk free rate of interest.
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A real rate of interest is the compensation paid by the borrower of funds to the lender.
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A yield curve that reflects relatively similar borrowing costs for both short- and long-term loans is called a normal yield curve.
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An A rated bond should provide investors with a higher yield than an otherwise identical B rated bond.
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An inverted yield curve is an upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
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Any bond rated Aaa through Caa according to Moody's, would be considered investment grade debt.
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Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.
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Eurobond bond is a bond denominated in Euros.
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Floating-rate bonds are bonds that can be redeemed at par at the option of their holder 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.
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In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.
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Longer the maturity of a Treasury security, the smaller the interest rate risk.
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Putable bonds give the bondholders an option to sell the bond at a price higher than par value by the amount of one year interest payment when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.
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Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.
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Stock purchase warrants are instruments that give their holder the right to purchase a certain number of shares of the firm's common stock at the market price over a certain period of time.
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The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.
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The level of risk associated with a given cash flow positively affects its value.
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The liquidity preference theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.
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The lower a bond's default risk, the higher is the interest rate.
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The nominal rate of interest on a bond is 7% and an inflation premium of 3%. This results in a real rate of interest of 4% on the bond.
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The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called maturity risk.
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The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment obligations by maintaining a specified level of fixed assets
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The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.
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The value of an asset depends on the historical cash flow(s) up to the present time.
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With subordinated debentures, payment of interest by a firm is required only when earnings are available.
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trustee is a paid party representing the bond issuer in the bond indenture.
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A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.
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A bond issued by an American company that is denominated in Swiss Francs and sold in Switzerland would be an example of a foreign bond.
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A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features—coupon interest rate, par value, and interest payment frequency—are the same.
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A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
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A flat yield curve means that the rates do not vary much at different maturities.
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A foreign bond is a bond issued by a foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market.
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A normal yield curve is upward-sloping and indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
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An interest rate or a required rate of return represents the cost of money.
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An inverted yield curve is a downward-sloping yield curve that indicates that short-term interest rates are generally higher than long-term interest rates.
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Any Ba rated bond or lower would be considered speculative or "junk."
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As a bond approaches maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity.
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Coupon interest rate on a bond represents the percentage of the bond's par value that will be paid annually, typically in two equal semiannual payments, as interest.
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Debentures such as convertible bonds are unsecured bonds that only the most creditworthy firms can issue.
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Duration measures the sensitivity of a bond's prices to changing interest rates
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High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.
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IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.
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If a bond's required return always equals its coupon interest rate, the bond's value will remain at par until it matures.
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In a bond indenture, subordination is the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
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In the valuation process, the higher the risk, the greater is the required return.
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In theory, the rate of return on U.S. Treasury bills should always exceed the rate of inflation as measured by the consumer price index.
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Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.
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Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.
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Longer the maturity, higher is the cost of a bond.
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Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.
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Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.
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Restrictive covenants place operating and financial constraints on the borrower.
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Restrictive covenants, coupled with standard debt provisions, help the lender to monitor the borrower's activities to ensure efficient use of funds.
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Risk-free rate of interest is equal to the sum of the real rate of interest plus an inflation premium.
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Since a putable bond gives its holder the right to "put the bond" at specified times or because of specified actions by the issuing firm, the bond's yield would be lower than that of an otherwise equivalent non-putable bond.
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Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.
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Subordination means that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
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The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained.
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The call option in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have fallen since the bond was issued.
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The components of risk premium includes business risk, financial risk, interest rate risk, liquidity risk, and tax risk.
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The expectations theory suggests that the shape of the yield curve reflects investors expectations about future interest rates.
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The liquidity preference theory suggests that for any given issuer, long-term interest rates tend to be higher than short-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer-term securities; this causes the yield curve to be upward-sloping.
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The liquidity preference theory suggests that short-term interest rates should be lower than long-term interest rates.
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The market price of a callable bond will not generally exceed its call price, except in the case of a convertible bond.
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The market segmentation theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.
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The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander.
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The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called default risk.
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The reason for a difference in the yield between a Aaa corporate bond and an otherwise identical Baa bond is the risk premium; other things being equal.
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The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, or 2) the firm's risk has changed.
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The term structure of interest rates is a graphical presentation of the relationship between the maturity and rate of return.
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The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.
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The value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate.
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The yield to maturity on a bond with a current price equal to its par or face value, will always be equal to the coupon interest rate.
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There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.
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To carry out systematic retirement of bonds, a corporation makes semiannual or annual payments that are used to retire bonds by purchasing them in the marketplace.
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To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.
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Upward-sloping yield curves result from higher future inflation expectations, lender preferences for shorter maturity loans, and greater supply of short-term as opposed to long-term loans relative to their respective demand.
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Valuation is the process that links risk and return to determine the worth of an asset.
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When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.
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When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.
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When the required return is different from the coupon interest rate and is constant until maturity, the value of the bond will approach its par value as it nears maturity.
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Yield to call represents the rate of return that investors earn if they buy a callable bond at a specific price and hold it until it is called back and they receive the call price, which would be set above the bond's par value.
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Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.
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