Finance Chapter 6
The basic valuation model, risk is generally incorporated into the _______.
Discount rate
The legal contract setting forth the terms and provisions of a corporate bond is a(n) _______
Indenture
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ______.
Inverted yield curve
A $1000, 8% bond sells for $980. $1000 is called the _____.
Par value
______ rate of interest creates equilibrium between the supply of savings and the demand for investment funds.
Real
Generally, an increase in risk will result in ______.
a higher required return or interest rate
a debenture is...
an unsecured bond that only creditworthy firms can issue.
The return expected from an asset is fully defined by its _______.
cash flow and timing.
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 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.
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.
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 riskininess of publicly traded bond issues is rates by independent agencies. According to Moody's rating system, an Aaa bond and a Ccc bond are ________ and ______ respectively.
prime quality; speculative
The current yield on a bond is measured by ________.
the annual interest payment divided by the current price.
Nominal rate of interest is equal to _______.
the risk - free rate plus risk at a premium
A _______ is a paid individual, corporation, or a commercial abnk trust department that acts as a third party to a bond indenture.
trustee