Exam 6: Interest Rates and Bond Valuation

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

If the required return is greater than the coupon rate, a bond will sell at

A feature that allows bondholders to change each bond into a stated number of shares of common stock is called

When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.

The market price of outstanding issues often varies from par because

To carry out the sinking fund requirements, corporations often make semi-annual or annual payments to trustees, who uses these funds to retire bonds by purchasing them in the marketplace.

All of the following are examples of long-term debt EXCEPT

In theory, the rate of return on U.S. treasury bills should always exceed the rate of inflation as measured by the consumer price index.

The yield to maturity on a bond with a price equal to its par value will

The process that links risk and return in order to determine the worth of an asset is termed

All of the following are examples of standard debt provisions EXCEPT

Any bond rated according to Moody's Ba or lower would be considered speculative or "junk."

Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called

A putable bond gives the bondholder

Restrictive covenants, which are also known as standard debt provisions, place operating and financial constraints on the borrower.

Table 6.2 -Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)

The reason for a difference in the yield between a Aaa corporate bond and an otherwise identical Baa bond is the risk premium; the real interest rate and the inflation rate is the same for both.

In general, IBM bonds will experience less trading activity (in terms of the number of bonds traded on a given day) compared to IBM stock.

Explain liquidity, default risk, and maturity risk premiums.

The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.