Exam 6: Interest Rates and Bond Valuation

In a practical sense, the longer the term of a bond, the greater the default risk associated with the bond.

The purpose of the restrictive debt covenant that prohibits borrowers from entering into certain types of leases is to

As an outstanding bond approaches maturity, the price of the bond will always trend toward par value until, at maturity, the bond is worth its face value.

Floating-rate bonds are bonds that can be redeemed at par at the option of their holder 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.

Consider the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is

The ________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds.

In the valuation process, the higher the risk, the greater the required return.

A ________ gives purchasers inflation protection.

A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.

A debenture is

A call feature is a feature included in all corporate bonds and allows the issuer to repurchase bonds at the market price prior to maturity.

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.

According to Moody's, a bond rated A should provide investors with a higher yield than an otherwise identical bond rated B.

A bond issued by an American Company that is denominated in Swiss Francs and sold in Switzerland would be an example of a foreign bond.

The length of the maturity on a bond offering affects its cost. In general, the longer the maturity, the lower the cost.

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to limit the amount of fixed-payment obligations.

A foreign bond is issued in a host country's financial market, in the host country's currency, by a foreign borrower.

The expectations theory suggests that the shape of the yield curve reflects investors expectations about future inflation rates.

Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.

The risk premium over and above the risk free rate consists of a number of components, including all of the following EXCEPT