Finance chapter 6 concepts

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? Interest rate risk premium Inflation premium Liquidity premium Taxability premium Default risk premium

Default risk premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? Interest rate risk premium Inflation premium Liquidity premium Taxability premium Default risk premium

Liquidity premium

The relationship between nominal returns, real returns, and inflation is referred to as the: call premium. Fisher effect. conversion ratio. spread. current yield.

fisher effect

The written agreement that contains the specific details related to a bond issue is called the bond: indenture. debenture. document. registration statement. issue paper.

indenture

A real rate of return is defined as a rate that has been adjusted for which one of the following? Inflation Interest rate risk Taxes Liquidity Default risk

inflation

When a bond's yield to maturity is less than the bond's coupon rate, the bond: had to be recently issued. is selling at a premium. has reached its maturity date. is priced at par. is selling at a discount.

is selling at a premium.

An upward-sloping term structure of interest rates indicates: the real rate of return is lower for short-term bonds than for long-term bonds. there is an indirect relationship between real interest rates and time to maturity. there is an indirect relationship between nominal interest rates and time to maturity. the nominal rate is declining as the real rate rises as the time to maturity increases. the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

The market-required rate of return on a bond that is held for its entire life is called the: coupon rate. yield to maturity. dirty yield. call premium. current yield.

yield to maturity

All else held constant, the present value of a bond increases when the: coupon rate decreases. yield to maturity decreases. current yield increases. time to maturity of a premium bond decreases. time to maturity of a zero coupon bond increases.

yield to maturity decreases.

A protective covenant: protects the borrower from unscrupulous practices by the lender. guarantees the interest and principal payments will be paid in full on a timely basis. prevents a bond from being called. limits the actions of the borrower. guarantees the market price of a bond will never be less than par value.

limits the actions of the borrower.

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. face value market price maturity coupon rate issue date

maturity

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: nominal rate. real rate. dirty rate. coupon rate. clean rate.

nominal rate

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: 5-year, 7 percent coupon bonds. 20-year, 6 percent coupon bonds. 20-year, zero coupon bonds. 2-year, 7 percent coupon bonds. 3-year, zero coupon bonds.

2-year, 7 percent coupon bonds.

Which one of the following statements is true? The current yield on a par value bond will exceed the bond's yield to maturity. The yield to maturity on a premium bond exceeds the bond's coupon rate. The current yield on a premium bond is equal to the bond's coupon rate. A premium bond has a current yield that exceeds the bond's coupon rate. A discount bond has a coupon rate that is less than the bond's yield to maturity.

A discount bond has a coupon rate that is less than the bond's yield to maturity.

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: BB. B. B. Ba. BBB.

BBB

The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium I, II, and V I, III, and V II, III, and IV I, II, and IV II, IV, and V

I, II, and IV

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? Taxability risk premium Default risk premium Interest rate risk premium Real rate of return Bond premium

Interest rate risk premium

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds? Real rate Liquidity premium Interest rate risk premium Inflation premium Taxability premium

Liquidity premium

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: upward sloping. flat. humped. downward sloping. double-humped.

downward sloping

The term structure of interest rates represents the relationship between which of the following? Nominal rates on risk-free and risky bonds Real rates on risk-free and risky bonds Nominal and real rates on default-free, pure discount bonds Market and coupon rates on default-free, pure discount bonds Nominal rates on default-free, pure discount bonds and time to maturity

Nominal rates on default-free, pure discount bonds and time to maturity

Which one of the following bonds is most apt to have the smallest liquidity premium? Treasury bill Corporate bond issued by a new firm Municipal bond issued by the State of New York Municipal bond issued by a rural city in Alaska Corporate bond issued by General Motors (GM)

Treasury bill

What is the principal amount of a bond that is repaid at the end of the loan term called? Coupon Market price Accrued price Dirty price Face value

face value

A debenture is: an unsecured bond. a bearer form bond. a bond with a call provision. a bond with a sinking fund provision. a bond secured by a blanket mortgage.

an unsecured bond.

The inflation premium: increases the real return. is inversely related to the time to maturity. remains constant over time. rewards investors for accepting interest rate risk. compensates investors for expected price increases.

compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a: coupon bond's current yield to increase. zero coupon bond's price to decrease. fixed-rate bond's coupon rate to decrease. zero coupon bond's current yield to decrease. coupon bond's yield to maturity to decrease.

coupon bond's yield to maturity to decrease.

A bond's annual interest divided by its face value is referred to as the: market rate. call rate. coupon rate. current yield. yield-to-maturity.

coupon rate

The current yield on a bond is equal to the annual interest divided by the: issue price. maturity value. face amount. current market price. current par value.

current market price

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: note. bearer form bond. debenture. registered form bond. call protected bond.

debenture

Bond ratings classify bonds based on: liquidity, market, and default risk. liquidity, interest rate, and default risk. default risk only. interest rate, inflation rate, and default risk. default and liquidity risks.

default risk only

A call provision grants the bond issuer the: right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. option to exchange the bonds for equity securities. right to automatically extend the bond's maturity date. right to repurchase the bonds on the open market prior to maturity. option of repurchasing the bonds prior to maturity at a prespecified price.

option of repurchasing the bonds prior to maturity at a prespecified price.

The primary purpose of bond covenants is to: meet regulatory requirements. define the bond's repayment terms. protect the bondholders. identify the bond's rating. protect the bond issuer from lawsuits.

protect the bondholders.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. annual semiannual quarterly monthly daily

semiannual