Finance Final Ch. 7 (Terms, not equation based)

While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond. Based on this information you know that: A) The bond with the lower coupon rate will have the lower current yield B) The bond with the longest time to maturity will have the highest yield to maturity. C) Both bonds will have the same bond rating D) Both bonds will have the same yield to maturity.

A) The bond with the lower coupon rate will have the lower current yield.

Which is true of convertible bonds? A) These bonds are convertible into common stock of the issuing firm at a prespecified price. B) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. C) The holder can convert these bonds into an equal number of new bonds if they choose to do so. D) These bonds have a variable interest rate.

A) These bonds are convertible into common stock of the issuing firm at a prespecified price.

Zevo Corp. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1000, and matures in 10 years. Which of the following is most correct? A) An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures B) An investor who purchases the bond today will earn a return of 7% if he sells the bond after one year C) An investor who purchases the bond today will earn a return of 10% if he sells the bond after a year D) An investor who purchases the bond today will earn a return of 17% per year if he holds the bond until it matures.

A)An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures

The present value of the expected future cash flows of an asset represents the asset's_____ A) Book value B) Intrinsic Value C) Liquidation Value D) Par Value

B) Intrinsic Value

Which is true of a zero coupon bond? A) The bond sells at a premium prior to maturity B) The bond makes no coupon payments C) The bond has a zero par value D) The bond has no value until the year it matures because there are no positive cash flows until then.

B) The bond makes no coupon payments

Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than their yield to maturity. Which of the following is true when comparing the bonds? A) The longer maturity bond has a smaller premium B) The longer maturity bond has a greater premium C) The longer maturity bond has a greater discount D) The longer maturity bond has a smaller discount

B) The longer maturity bond has a greater premium

Which of the following statements concerning bonds and risk is true? A) B-rated bonds are above average for risk, i.e. less risky than the average bond B) Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money C) Bonds are generally less risky than common stock because of the preferences for debt over equity in the event of bankruptcy and liquidation D) Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk.

C) Bonds are generally less risky than common stock because of the preferences for debt over equity in the event of bankruptcy and liquidation.

Finance theory suggest that the current market value of a bond is based upon which of the following? A) The future value of interest paid on a bond B) The present value of a bond's par value plus the future value of the bond's present value C) The sum of the present value of the bond's interest payments and the present value of the principal. D) The sum total of principle and interest paid on a bond.

C) Sum of the present value of the bond's interest payments and the present value of the principal.

Which of the following bond provisions will make a bond more desirable to investors, other things equal? A)The coupon rate is lower B) The bond is callable C) The bond is convertible D) The bond is subordinated

C) The bond is convertible

Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at: A) Par value B) premium to par value C) discount to par value D) Cannot be determined w/out knowing # of years to maturity

C) discount to par value

Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A) subordinated debentures B) unsubordinated debentures C) common stock D) preferred Stock

Common Stock, Preferred Stock, Subordinated debenture, Unsubordinated debenture In the case of solvency, claim on assets goes first to claims of debt (debentures) before those of shareholders.

Speculative, or non-investment grade bonds have an S&P bond rating of: A) CCC or less B) BBB or less C) C or less D) BB or less

D) BB or less

Which type of value is shown on the firm's balance sheet? A) Liquidation Value B) Intrinsic Value C) Market Value D) Book Value

D) Book Value

The correct relationship for a premium bond is: A) Current yield > coupon rate> yield to maturity B) current yield > yield to maturity > coupon rate C) coupon rate > yield to maturity > current yield D) Coupon rate > current yield > yield to maturity

D) Coupon rate > current yield > yield to maturity

Which of the following statements is true? A) Interest rate risk is highest during periods of high interest rates B) Short-term bonds have greater interest rate risk than do long-term bonds C) All bonds have equal interest rate risk. D) Long-term bonds have greater interest rate risk than do short-term bonds

D) Long term bonds have greater interest rate risk than do short term bonds

Market efficiency implies which of the following? A) Liquidation value = book value B) book value = market value C) book value = intrinsic value D) market value = intrinsic value

D) market value = intrinsic value

Which of the following affect an assets's value to an investor? I: Amount of an asset's expected cash flow II: The riskiness of the cash flows III: Timing of an assets cash flows IV: Investor's required rate of return

I,II,III, IV

The yield to maturity on long-term bonds:

Is equal to the current yield if the bond is selling for face value.

If market interest rates rise:

Long-term bonds will decline in value more than short-term bonds.

If a Firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claims paid:

Mortgage bonds would be paid first

1) Debentures 2) Subordinated Debentures 3) Mortgage Bonds 4) Eurobonds 5) Convertible Bonds

Name the Types of Bonds (There are 5)

If a corporation were to choose between issuing a debenture, a mortgage bond, or subordinated debenture, which would have the highest yield to maturity?

Subordinated would have highest return

Indenture

The legal agreement between the firm issuing the bond and the trustee who represents the bondholders.

Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then:

The value of both bonds will increase.

A bond selling at a discount will have a built in capital gain if the bond is held to maturity: True or false?

True

An Example of a Eurobond is a bond issued by Asia by a U.S. corporation with interest and principal payments made in U.S. dollars. (True or False)

True

Subordinated debentures are more risky than unsubordinated because the claims of subordinated debenture holders are less likely to be honored in the event of a liquidation. (True or False)

True

The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds. True or False?

True

To determine the periodic interest payments that a bond makes, multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year. True or False?

True

In an efficient market, two investors may agree on the amount and timing of a bond's expected cash flows and also on the bond's risk level, as measured by its debt rating, and still determine two different values for the bond: True or False?

True, The investor's willingness to bear risk could cause different valuations.

The yield to maturity is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond. (True or False)

True.

Bond

Type of long term promissory note, issued by a borrower, promising to its holder, a predetermined and fixed amount of interest per year and repayment of principal at maturity.

Debentures

Unsecured Long term debt Benefit: no property has to be secured

Call Provision

gives corporation the option to redeem the bonds before the maturity date.

Subordinated Debentures

hierarchy of payout in case of solvency