FINANCE EXAM 2

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

A 10-year zero coupon bond.

Which of the following bonds has the greatest price risk?

A 10-year, $1,000 face value, zero coupon bond.

Which of the following factors would be most likely to lead to an increase in nominal interest rates?

A new technology like the Internet has just been introduced, and it increases investment opportunities.

Which of the following statements is CORRECT?

All else equal, long-term bonds have less reinvestment risk than short-term bonds

Which of the following statements is CORRECT?

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

Considered alone, which of the following would increase a company's current ratio?

An increase in accounts receivable.

Which of the following would be most likely to lead to a higher level of interest rates in the economy?

Corporations step up their expansion plans and thus increase their demand for capital.

Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%The differences in these rates were probably caused primarily by:

Default and liquidity risk differences.

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT

If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Market interest rates decline sharply.

Suppose the U.S. Treasury issued $50 billion of short-term securities and sold them to the public. Other things held constant, what would be the most likely effect on short-term securities' prices and interest rates?

Prices would decline and interest rates would rise.

Which of the following statements is CORRECT?

Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.

Which of the following statements is CORRECT?

Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?

The bond's expected capital gains yield is zero.

Which of the following would indicate an improvement in a company's financial position, holding other things constant?

The current and quick ratios both increase.

Which of the following statements is CORRECT?

The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Which of the following statements is CORRECT?

The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

The price of Bond A will decrease over time, but the price of Bond B will increase over time.

Which of the following would generally indicate an improvement in a company's financial position, holding other things constant?

The quick ratio increases.

In the foreseeable future, the real risk-free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be 0.1(t - 1)%, where t is the number of years until the bond matures. Given this information, which of the following statements is CORRECT?

The yield curve must be upward sloping.

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

The yield on a 10-year bond would be less than that on a 1-year bill.

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

c. 20-year, zero coupon bond.