Finance Exam 2 Ch. 6
Valuation is the process that links risk and return to determine the worth of an asset.
True
When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.
True
Convertible bonds are normally ________.
debentures
In the basic valuation model, risk is generally incorporated into the ________.
discount rate
If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will ________.
equal the face value
A(n) ________ gives purchasers inflation protection.
floating rate bond
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ________.
Inverted Yield Curve
________ are debt rated Ba or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers.
Junk Bonds
________ are popular vehicle used to finance mergers and takeovers.
Junk Bonds
The return expected from an asset is fully defined by its ________.
cash flow and timing
For an investor who plans to purchase a bond maturing in one year, the primary consideration should be ________.
yield to maturity
Deeply discounted bond that pays no coupon interest is a ________.
zero coupon bond
When issuing a(n) ________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures.
zero coupon bond
A(n) ________ is issued with no or very low coupon and sells significantly below its par value.
zero or low coupon bond
What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?
$1,060
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.
$1,113.00
Any bond rated Aaa through Caa according to Moody's, would be considered investment grade debt.
False
Duration measures the sensitivity of a bond's prices to changing interest rates.
True
Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.
$656.82
________ is used to finance "rolling stock"-airplanes,trucks,boats,railroad cars.
Equipment trust certificates
A Eurobond bond is a bond denominated in Euros.
False
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.
True
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.
True
Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.
True
Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________.
income bond
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
$1,114.70
Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is ________.
10.79 percent
Generally, an increase in risk will result in ________.
A higher required return or interest rate
Which of the following explains the general shape of the yield curve of a bond? A) Expectations theory B) Perfect market theory C) Capital asset pricing theory D) Securities market theory
A) Expectations theory
________ are commonly issued in the reorganization of a failed or failing firm. A) Floating rate bonds B) Income bonds C) Mortgage bonds D) Equipment trust certificates
B) Income bonds
A type of long-term financing used by both corporations and government entities is ________.
Bonds
Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par; premium B) discount; par C) discount; premium D) coupon; premium
C) discount; premium
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
Call
________ are secured by stock and/or bonds that are owned by the issuer.
Collateral trust bonds
The ________ feature allows bondholders to change each bond into stated number of shares of stock.
Conversion
A bond will sell at a premium when its required return rises above its coupon interest rate.
False
The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________. A) perfect positive correlation B) constant C) direct D) inverse
D) Inverse
Interest rate risk and the time to maturity have a relationship that is best characterized as ________.
Direct
The level of risk associated with a given cash flow positively affects its value.
False
A $1,000, 8% bond sells for 980. $1,000 is called the ________.
Par value
________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.
Real
A ________ give bondholders the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time.
Stock Purchase Warrant
________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time.
Stock Purchase Warrants
________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied.
Subordinated debentures
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.
True
Nominal rate of interest is equal to ________.
The risk-free rate plus a risk premium
Any Ba rated bond or lower would be considered speculative or "junk."
True
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.
True
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.
True
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.
True
The market price of a callable bond will not generally exceed its call price, except in the case of a convertible bond.
True
When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.
True
A(n) ________ yield curve reflects higher expected future rates of interest.
Upward-Sloping
The process that links risk and return in order to determine the worth of an asset is termed ________.
Valuation
If the required return is greater than the coupon rate, a bond will sell at ________.
a discount
On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates.
a floating rate bond
High-risk, high-yield junk bonds have declined in popularity over time due to ________.
a number of major defaults on these bonds
If the required return is less than the coupon rate, a bond will sell at ________.
a premium
A bond rated Aaa according to Moody's, is considered ________.
a prime quality bond
Yield to maturity on a bond with price equal to its par value will ________.
always be equal to the coupon rate
A debenture is ________.
an unsecured bond that only creditworthy firms can issue
When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________.
approach par
A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.
at a premium; at a discount; equal to the par value
ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________.
bond E will have a greater change in price
Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates.
floating rate bonds
A foreign bond is issued by a(n) ________.
foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market
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
The decision to refund a callable bond ________.
is a capital budgeting decision
Bonds are ________.
long-term debt instruments used to raise large sums of money
Corporate bonds have a ________.
par value of $1,000
An example of a standard debt provision is to ________.
pay taxes and other liabilities when due
The value of a bond is the present value of its interest payments plus ________.
present value of its par value
The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody's rating system, an Aaa bond and a Caa bond are ________ and ________ respectively.
prime quality; speculative
The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to
protect the original lender in the priority of claims during liquidation
Bonds that can be redeemed at par at the option of their holders 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 are called ________.
putable bonds
A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity.
sinking-fund requirement
The value of any asset is the ________.
sum of the present values of all future cash flows it is expected to provide over the relevant time period
The current yield on a bond is measured by ________.
the annual interest payment divided by the current price
If the coupon rate of a bond is equal to its required rate of return, then ________.
the current value is equal to par value
A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.
$1,268.40
What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.
$1,689.54.
Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?
$15,505
A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?
$4,914
A record collector has agreed to sell her entire collection to a historical museum in three years at a price of $100,000. The current risk-free rate is 7 percent. At what price should she value her collection today?
$81,630
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.
$840.73
What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?
$940
What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?
13 percent
Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?
14.54 percent
Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?
6.71 percent
What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?
9.3 percent
When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________. A) remain at par B) increase C) decrease D) change depending on whether it is a discount or premium bond
A) remain at par
________ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders.
Extendible notes
A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
False
A call premium is the amount by which the call price exceeds the market price of the bond.
False
An A rated bond should provide investors with a higher yield than an otherwise identical B rated bond.
False
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.
False
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.
False
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.
False
The value of an asset depends on the historical cash flow(s) up to the present time.
False
With subordinated debentures, payment of interest by a firm is required only when earnings are available.
False
A significant portion of the return on a zero coupon bond is in the form of ________.
Gain in Value
________ bonds are characterized by interest payments that are required only when earnings are available.
Income
A(n) ________ is secured by real estate.
Mortgage Bond
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.
True
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.
True
Debentures such as convertible bonds are unsecured bonds that only the most creditworthy firms can issue.
True
If a bond's required return always equals its coupon interest rate, the bond's value will remain at par until it matures.
True
In the valuation process, the higher the risk, the greater is the required return.
True
Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.
True
Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.
True
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.
True
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.
True
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.
True
The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.
True
The value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate.
True
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.
True
The key inputs to the valuation process include ________.
cash flow, cash flow timing, and risk
Which of the following is a restrictive covenant? A) to maintain satisfactory accounting records B) to pay the taxes due C) to supply audited financial statements D) to impose fixed asset restrictions
to impose fixed asset restrictions
Stock purchase warrants are instruments that give their holders ________.
the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time
A putable bond gives the bondholder ________.
the right to redeem the bond back to the corporation at par
Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that ________.
there is no difference in price
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.
False
The lower a bond's default risk, the higher is the interest rate.
False
Which of the following affects the slope of yield curve? A) tax rates B) dividend policy C) selection of accounting standards D) liquidity preferences
Liquidity Preferences
________ mainly explains the tendency for the yield curve to be upward sloping.
Liquidity preference theory
The ________ rate is typically the nominal rate of interest on a three-month U.S. Treasury bill.
Risk-free
________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied.
Subordination
A normal yield curve is upward-sloping and indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
True
An interest rate or a required rate of return represents the cost of money.
True
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.
True
High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.
True
IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.
True
In a bond indenture, subordination is the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
True
In a bond indenture, the term "security interest" refers to collateral pledged against the bond.
True
Longer the maturity, higher is the cost of a bond.
True
Nominal rate of interest is equal to the sum of the real rate of interest plus an inflation premium plus a risk premium.
True
Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.
True
Restrictive covenants place operating and financial constraints on the borrower.Restrictive covenants place operating and financial constraints on the borrower.
True
Restrictive covenants, coupled with standard debt provisions, help the lender to monitor the borrower's activities to ensure efficient use of funds.
True
Risk-free rate of interest is equal to the sum of the real rate of interest plus an inflation premium.
True
The components of risk premium includes business risk, financial risk, interest rate risk, liquidity risk, and tax risk.
True
The expectations theory suggests that the shape of the yield curve reflects investors expectations about future interest rates.
True
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.
True
The term structure of interest rates is a graphical presentation of the relationship between the maturity and rate of return.
True
The yield curve in an economic period where higher future inflation is expected would be
Upward-Sloping
The ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity.
Yield to Maturity
The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________.
avoid default of payments to bondholders
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
Bond indentures include restrictive covenants.These provisions protect the bondholders against ________.
increase in borrower's risk
The cost of a long-term debt generally ________ that of a short-term debt.
is greater than
The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________.
limit the amount of fixed-payment obligations
The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________.
limit the realization of current assets to cash
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 purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________.
prevent the firm from liquidation and ensure its ability to repay the debt
The term structure of interest rates is the relationship between ________.
the maturity and rate of return for bonds with similar level of risk
Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.
False
Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?
1 percent
The inflation risk premium on a bond is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the bond is 3 percent, the default risk premium on the bond is 2 percent, and the liquidity risk premium on the bond is 1 percent. Calculate its nominal rate of return.
13 percent
Which of the following affects the cost of a bond? A) maturity of a bond B) dividend policy C) fixed assets purchased from the proceeds of bond issue D) money market regulations
A) maturity of a bond
The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________. A) not related B) inversely related C) independent D) perfectly positively correlated
B) inversely related
A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________.
Corporate Bond
Assume the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is ________.
Downward Sloping
The yield curve in an economic period where lower future inflation is expected would be ________.
Downward-Sloping
A(n) ________ yield curve reflects lower expected future rates of interest.
Downward-sloping
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.
False
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.
False
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.
False
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.
False
A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
False
A flat yield curve indicates generally cheaper long-term borrowing costs than short-term borrowing costs.
False
A nominal rate of interest is equal to the sum of the real rate of interest plus the risk free rate of interest.
False
A real rate of interest is the compensation paid by the borrower of funds to the lender.
False
A trustee is a paid party representing the bond issuer in the bond indenture.
False
A yield curve that reflects relatively similar borrowing costs for both short- and long-term loans is called a normal yield curve.
False
An inverted yield curve is an upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term borrowing costs.
False
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.
False
Longer the maturity of a Treasury security, the smaller the interest rate risk.
False
Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.
False
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.
False
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.
False
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.
False
The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called maturity risk.
False
The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment obligations by maintaining a specified level of fixed assets.
False
A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called as ________.
Flat Yield Curve
The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________.
Indenture
The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called ________.
Liquidity Preference Theory
________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds.
Nominal
An upward-sloping yield curve that indicates cheaper short-term borrowing costs than long-term borrowing costs is called as
Normal Yield Curve
A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
True
A flat yield curve means that the rates do not vary much at different maturities.
True
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.
True
Subordination means that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
True
The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained.
True
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.
True
The liquidity preference theory suggests that short-term interest rates should be lower than long-term interest rates.
True
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.
True
The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander.
True
The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called default risk.
True
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.
True
There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.
True
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.
True
To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.
True
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.
True
A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture.
Trustee
A(n) ________ is a graphic depiction between the maturity and rate of return for bonds with similar risks.
Yield Curve
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 ________ in the capital market is the basis for determining a bond's coupon interest rate.
Cost of Money
Which of the following is true of risk premium? A) T-bills have a have a higher risk premium than that of Treasury bonds. B) The government bonds have a higher risk premium than that of corporate bonds. C) The speculative corporate issues have a lower risk premium than that of the higher rated corporate issues. D) The lower-rated corporate issues have a higher risk premium than that of the higher rated corporate issues.
D) The lower-rated corporate issues have a higher risk premium than that of the higher rated corporate issues.
