Exam 6: Interest Rates and Bond Valuation

All of the following are examples of restrictive debt covenants EXCEPT

An inverted yield curve is downward-sloping and indicates generally cheaper long-term borrowing costs than short-term borrowing costs.

________ is issued with a very low coupon and sells significantly below its par value.

In a bond indenture, the term security interest refers to collateral pledged against the bond.

A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.

________ are commonly issued in the reorganization of a failed or failing firm.

When valuing a bond, the characteristics of the bond that remain fixed are all of the following EXCEPT the

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

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

________ yield curve reflects higher expected future rates of interest.

What is the nominal rate of return on an IBM bond if the real rate of interest is 3 percent, the inflation risk premium is 2 percent, the U.S. T-bill rate is 5 percent, the maturity risk premium on the IBM bond is 3 percent, the default risk premium on the IBM bond is 2 percent, and the liquidity risk premium on the bond is 1 percent?

Restrictive covenants, coupled with standard debt provisions, allow the lender to monitor and control the borrower's activities in order to protect itself against increases in borrower risk.

When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.

The ________ is the annual rate of interest earned on a security purchased on a given date and held to maturity.

A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity. This option has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have risen since the bond was issued.

Whenever a bond's required return is different from its coupon interest rate, the passage of time will affect the bond's value, even if the required return remains constant until maturity.

The nominal rate of interest is equal to the sum of the real rate of interest plus the risk free rate of interest.

Although Treasury securities have no risk of default or illiquidity, they do suffer from "maturity risk"the risk that interest rates will change in the future and thereby impact longer maturities more than shorter maturities.

On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates.

The liquidity preference theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.