Chapter 6: Finance Midterm 2
Which of the following is not a difference between debt and equity? - Equity represents ownership interest, while debt does not. - Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy. - Equity is publicly traded, while debt is not. - A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not.
- Equity is publicly traded, while debt is not.
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations.
The coupon payments on floating-rate bonds are ______.
adjustable
If bonds for AT&T are quoted at 115, they can be purchased:
at 115 percent of par value plus accrued interest.
If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased ______.
at 99.5 percent of face value plus any accrued interest
The bid-ask spread represents the ______.
dealer's profit
When interest rates in the market rise, we can expect the price of bonds to ______.
decrease
A limitation of bond ratings is that they ______.
focus exclusively on default risk
A sukuk is in compliance with the Islamic law as the financing instrument is not charging any ______ or making money from money.
interest
Indentures and loan agreements often contain protective covenants designed to protect the interests of ______.
lenders
A zero coupon bond is a bond that ______.
makes no interest payments
If a bond is issued with a call provision, it allows the issuer to ______ part or all of the bond at defined prices and times
repurchase
The degree of interest rate risk depends on ______.
the sensitivity of the bond's price to interest rate changes
What is the purpose of a sinking fund?
to create a fund to repay bonds when they fall due
True or false: The government sells Treasury notes and bonds to the public every month.
True: The government sells Treasury notes and bonds to the public every month.
If a bond is issued with a ______ provision it allows the issuer to repurchase part or all of the bond at defined prices and times.
call
Which one of the following is the most important source of risk from owning bonds? - market interest rate fluctuations - loss of a bond certificate - coupon interest rate fluctuations - mergers
market interest rate fluctuations
Which of the following variables is not required to calculate the value of a bond? remaining life of bond original issue price of bond market yield to maturity coupon rate
original issue price of bond
A protective covenant is part of an indenture or loan agreement that limits certain actions a company may take during the term of the loan to ______ the lender's interests.
protect
What does a bond's rating reflect?
the ability of the firm to repay its debt and interest on time
Bond ratings are based on the probability of default risk, which is the risk that ______.
the bond's issuer may not be able to make all the required payments
A sukuk is a contract that is related to:
- Islamic law. - riba.
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______.
increases
Equity represents a(n) ______ interest of a firm.
ownership
Which of the following are bonds that have actually been issued? - a CoCo bond - a put bond - a silent bond - a convertible bond - a bunt-n-run bond
- a CoCo bond - a put bond - a convertible bond
A corporate bond's yield to maturity: - changes over time. - remains fixed over the life of the bond. - is usually not the same as a bond's coupon rate. - is always equal to a bond's coupon rate.
- changes over time. - is usually not the same as a bond's coupon rate.
What four variables are required to calculate the value of a bond? - Price at the time of bond issue - coupon rate - yield to maturity - par value - time remaining to maturity
- coupon rate - yield to maturity - par value - time remaining to maturity
What is the bid price?
- It is the price an investor will receive if he or she sells a bond to a dealer. - It is the price at which a dealer is willing to buy securities.
Most of the time, a floating-rate bond's coupon adjusts ______.
with a lag to some base rate
What are the cash flows involved in the purchase of a five-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of five years.
A bond with a BB rating has a ______ than a bond with a BBB rating.
higher risk of default
It is the duty of the bond ______ to manage the sinking fund so that bonds can be repaid.
trustee
What is a bond's current yield?
Current yield = Annual coupon payment/Price
True or false: Bond ratings are concerned only with the possibility of price changes.
False: Bond ratings are concerned only with the possibility of default.
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
True or false: Current yield = Annual coupon payment/Price
True
True or false: Long-term debt has maturities greater than one year.
True
What is the asked price? - It is the price at which an investor can buy a particular security from a dealer. - It is the percentage change in a bond's price since its issue. - It is the price at which a dealer is willing to sell a particular security. - It is the price at which a dealer is willing to buy a particular security.
- It is the price at which an investor can buy a particular security from a dealer. - It is the price at which a dealer is willing to sell a particular security.
What are some features of the OTC market for bonds?
- OTC dealers are connected electronically. - The OTC has no designated physical location.
The U.S. government borrows money by issuing ______.
- Treasury notes - Treasury bonds
Which of the following terms apply to a bond? - par value - coupon rate - dividend yield - time to maturity
- par value - coupon rate - time to maturity
What are the two major forms of long-term debt? - public issue - Canadian debt - private issue - debentures
- public issue - private issue
Which of the following are true of bonds? - Bond principal does not have to be repaid. - They are normally interest-only loans. - They are issued by both corporations and governments.
- They are normally interest-only loans. - They are issued by both corporations and governments.
What is a corporate bond's yield to maturity (YTM)?
- YTM is the prevailing market interest rate for bonds with similar features. - YTM is the expected return for an investor who buys the bond today and holds it to maturity.
As a general rule, which of the following are true of debt and equity? - Equity represents an ownership interest. - The maximum reward for owning debt is fixed. - Creditors generally have voting power. - Debt and equity represent the same financial claims.
- Equity represents an ownership interest. - The maximum reward for owning debt is fixed.
Which of the following is not a difference between debt and equity? - Equity is publicly traded, while debt is not. - Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy. - Equity represents ownership interest, while debt does not. - A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not.
Equity is publicly traded, while debt is not.
A key difference between interest payments and dividend payments is:
interest is tax deductible. dividends are not tax deductible.