Finance Chapter 6

The basic valuation model, risk is generally incorporated into the _______.

Discount rate

The legal contract setting forth the terms and provisions of a corporate bond is a(n) _______

Indenture

A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ______.

Inverted yield curve

A $1000, 8% bond sells for $980. $1000 is called the _____.

Par value

______ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.

Real

Generally, an increase in risk will result in ______.

a higher required return or interest rate

a debenture is...

an unsecured bond that only creditworthy firms can issue.

The return expected from an asset is fully defined by its _______.

cash flow and timing.

To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ______.

charges a higher interest rate on long-term loans.

The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to​ ________.

ensure a cash shortage does not cause an inability to meet current obligations.

Less certain a cash flow, the _____ the risk, and _____ the present value of the cash flow.

higher; lower

The value of a bond is the present value of the​ ________.

interest payments and maturity value.

Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico's ________.

nominal return on investment is more than 15 percent.

The riskininess of publicly traded bond issues is rates by independent agencies. According to Moody's rating system, an Aaa bond and a Ccc bond are ________ and ______ respectively.

prime quality; speculative

The current yield on a bond is measured by ________.

the annual interest payment divided by the current price.

Nominal rate of interest is equal to _______.

the risk - free rate plus risk at a premium

A _______ is a paid individual, corporation, or a commercial abnk trust department that acts as a third party to a bond indenture.

trustee