Finance Exam 2

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Coupon rate decreases and the time to maturity increases.

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

Crossover rate

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

A "fallen angel" is a bond that has moved from:

Investment grade to speculative grade.

Net present value:

Is the best method of analyzing mutually exclusive projects.

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

Which one of these is a negative covenant that might be found in a bond indenture?

The company cannot lease any major assets without bondholder approval.

If a project has a net present value equal to zero, then:

The project earns a return exactly equal to the discount rate.

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

Which one of the following bonds is the least sensitive to interest rate risk? 3-year; 4 percent coupon. 3-year; 6 percent coupon. 5-year; 6 percent coupon. 7-year; 6 percent coupon. 7-year; 4 percent coupon.

3-year; 6 percent coupon.

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? 6-year, high-coupon, put bond. 5-year TIPS. 10-year AAA coupon bond. 5-year floating rate bond. 7- year income bond.

7- year income bond.

Which one of these statements is correct? a) Most long-term bond issues are referred to as unfunded debt. b) Bonds provide tax benefits to issuers. c) The risk of a firm financially failing decreases when a firm issues bonds. d) All bonds are treated equally in a bankruptcy proceeding. e) A debenture is a senior secured debt.

Bonds provide tax benefits to issuers.

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Which one of the following relationships applies to a par value bond?

Coupon rate = current yield = yield-to-maturity.

Which one of the following best describes pro forma financial statements?

Financial statements showing projected values for future time periods.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: a. 3.5 percent. b. Greater than 3.5 percent but less than 7 percent. c. 7 percent. d. Greater than 7 percent. e. Less than 3.5 percent.

Greater than 7 percent

A zero coupon bond:

Has more interest rate risk than a comparable coupon bond.

Callable bonds generally:

Have a sinking fund provision.

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Have multiple rates of return.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Increases at a decreasing rate.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Mutually exclusive

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?

NPV

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

Note

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle.

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?

Yield to maturity less than the coupon rate.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than