Chapter 6
Which of the following is not a difference between debt and equity?
Equity is publicly traded, while debt is not.
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 (by the amount of the loan).
What is a real rate of return?
It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation.
Which of the following are true about a bond's face value?
It is also known as the par value. It is the principal amount repaid at maturity.
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices.
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.
What are two major forms of long-term debt?
Public and private issue
True or false: Long-term debt has maturities greater than one year.
True
As a general rule, which of the following are true of debt and equity?
The maximum reward for owning debt is fixed. Creditors generally have voting power. Equity represents an ownership interest.
What is are the differences between nominal rate and real rate?
The real rate has been adjusted for inflation, the nominal rate has not. A nominal rate change is the actual percentage change in the dollar value of an investment unadjusted for inflation. A real rate change is the percentage change in buying power.
Which of the following are true of bonds?
They are issued by both corporations and governments. They are normally interest-only loans.
Which one of the following is the most important source of risk from owning bonds?
market interest rate fluctuations
Equity represents a(n) _____ interest of a firm.
ownership
What is a corporate bond's yield to maturity (YTM)?
YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features.
A key difference between interest payments and dividend payments is:
interest is tax deductible, dividends are not.
A corporate bond's yield to maturity:
is usually not the same as a bond's coupon rate, changes over time.
The bonds of a firm in financial distress may have a market value that is _____ than the face value at maturity.
lower
A zero coupon bond is a bond that ______.
makes no interest payments
What does a bond's rating reflect?
the ability of the firm to repay its debt and interest on time. Bond ratings assess only the risk of default by the company.
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
What is a bond's face/par value?
the principal amount repaid at maturity.
The degree of interest rate risk depends on ______.
the sensitivity of the bond's price to interest rate changes
Which of the following terms apply to a bond?
time to maturity, coupon rate, par value
