Finance Chapter 6

The computation for a bond's yield to call (YTC) is different from that for its yield to maturity (YTM) because the _____ of the bond is substituted for the maturity (par) value.

Call price

A provision in a bond contract that gives the issuer the right to recall the bond and repay it prior to the stated maturity date is referred to as a(n):

Call Provisions

Omega Inc. is converting a $1,000 convertible bond with a conversion ratio of 50 into 50 shares of common stock. The conversion price is:

$20

A $1,000 convertible bond with a conversion ratio of 25 can be converted into 25 shares of common stock. The conversion price is:

$40

A few years ago, Super Tech Inc. issued a bond that has a face value equal to $1,000 and pays investors $20 interest every six months. The bond has eight years remaining until maturity. If you require an 8 percent rate of return to invest in this bond, what is the maximum price you should be willing to pay to purchase the bond? (Round off the answer to two decimal places.)

$766.95

A few years ago, Tangerine Technology issued a bond that has a face value equal to $1,000 and pays investors $20 interest every six months. The bond has eight years remaining until maturity. If an investor requires an 8 percent rate of return to invest in this bond, what is the maximum price he or she should be willing to pay to purchase the bond? (Round the answer to two places of decimal.)

$766.95

Beige Infotech plans to issue bonds with a par value of $1,000 and 12 years to maturity. These bonds will pay $50 interest every 6 months. Current market conditions are such that the bonds will be sold to net $874.50. Which of the following is the yield to maturity (YTM) of an issue that a broker would quote to an investor is? (Round the answer to the nearest whole number.)

12%

Which of the following short-term debts is issued in denominations of $100,000 by large, financially sound firms?

??

Which of the following is a type of promissory note issued by large, financially sound firms?

Commercial paper

Which of the following mathematical expressions computes current yield?

Current yield = Bond yield - Capital gains yield

Which of the following statements is true of semiannual compounding?

Each interest payment is half as large as the annual interest payment.

Any debt sold in a country other than the one in whose currency it is denominated is referred to as:

Eurodebt

A deposit in a foreign bank that is denominated in U.S. dollars is called a:

Eurodollar deposit.

_____ are backed by government's ability to tax its citizens.

General obligation bonds

Which of the following loans requires the principal amounts to be repaid in several payments during the lives of the loans?

Installment loans

Which of the following results from a higher risk and a more restricted market for lower-grade bonds?

Lower-grade bonds offer higher returns than high-grade bonds.

Which of the following bond values fluctuates continuously during the life of a bond?

Market Value

_____ risk and _____ risk tend to offset each other.

Price; reinvestment

_____ are used to raise funds for projects that will generate revenues that contribute to payment of interest and repayment of debt.

Revenue bonds

Which of the following statements is true of semiannual compounding?

The number of payments is twice the number of years in a bond's term.

Suppose the interest rate on a 10-percent 12-year zero-coupon bond with a $1,000 face value falls from 10 percent to 8 percent. Which of the following is true of the value of the bond? (Round the answer to two decimal places.)

The present value of the bond at 8 percent is $397.11.

An example of a short-term debt instrument is a:

Treasury bond.

A conversion feature permits a bondholder (investor) to exchange, or convert, the bond into shares of the company's common stock at _____.

a fixed price

A trustee represents the:

bondholders.

Changes in a firm's bond rating affect both the firm's ability to _____ as well as the _____.

borrow long-term capital; cost of such funds

Most corporate bonds contain a call provision, which gives the issuing firm the right to:

call in the bonds for redemption.

At the time a bond is issued, the _____ generally is set at a level that will cause the market price of the bond to equal its par value.

coupon rate

The portion of the total return on a bond attributed to the annual interest that the bond pays is called the _____ yield.

current

The greater a bond's _____, the greater the risk premium associated with the bond.

default risk

Loans from one bank to another bank are called:

federal funds.

A corporate bond's fixed coupon rate of interest results in:

fixed interest payments.

Since many of Eurocredits are very large, the lending bank:

forms a loan syndicate to help raise the needed funds.

One reason a lower-grade bond offers higher returns than a high-grade bond is that a lower-grade bond:

has a higher risk and a more restricted market than a high-grade bond.

The value of a bond is determined by computing the present value of the _____ and the present value of the _____.

interest payments; maturity value

The coupon rate on a bond is set immediately before the bond is issued by the firm so that the bond's:

issuing price equals its face (par) value.

If the market interest rates are greater than the coupon interest rate of a bond, the market value of the bond will be:

less than the maturity value of the bond

When the _____ value of debt is the same as its face value, it is said to be selling at _____ value.

market; par

As the principal value of a debt is repaid at the maturity date, it is referred to as the _____ value.

maturity

The date on which the principal amount of a debt is due is referred to as the:

maturity date.

Federal funds are borrowed by banks from other banks with excess reserves to:

meet the reserve requirements of the Federal Reserve.

A bond secured by tangible (real) assets is termed a _____ bond.

mortgage

A firm has the right to handle a sinking fund by randomly calling for redemption a certain percentage of the bonds each year at _____ value.

par

A bond that has a market value greater than its par value is called a _____ bond.

premium

The value of a bond is calculated by computing the _____ of all expected future cash flows.

present value

When economic conditions change, a bond that sold at par when it was issued will sell for more or less than par after its issue, depending on the relationship between the bond's _____ and the bond's _____.

prevailing market rates; coupon rate

Par value, maturity value, face value, and _____ are used interchangeably to designate the borrowed amount that must be repaid by the borrower.

principal value

The _____ must be repaid at some point during the life of the debt.

principal value of debt

The principal value of debt:

represents the amount owed to the lender, which must be repaid.

A provision that facilitates the orderly retirement of a bond issue is a:

sinking fund

Alpha Corporation's bond with a face value of $1,000 is currently selling at a discount in the financial markets. If the bond's yield to maturity is 12.5 percent, _____

the bond's coupon rate of interest will be less than 12.5 percent.

The percentage rate of return on a bond consists of the current yield plus:

the capital gains yield.

Reinvested cash flows will earn a lower rate of return if:

the interest rate declines.

A trustee guarantees that:

the terms of the bond indenture are carried out.

The average rate of return earned on a bond if it is held until the first call date is called the:

yield to call.