Exam 6: Interest Rates and Bond Valuation

A type of long-term financing used by both corporations and government entities is

To finance a new line of product, the Tangshan Toys has issued $1,000,000 bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.

The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to

There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.

The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called

________ are debt rated Ba or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers of other firms, particularly during the 1980s.

A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called

Nico Nelson, a management trainee at a large New York-based bank is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?

A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.

A record collector has agreed to sell her entire collection to a historical museum in three years at a price of $100,000. The current risk-free rate is 7 percent. At what price should she value her collection today?

A normal yield curve is upward-sloping and indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

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

________ bonds are characterized by interest payments that are required only when earnings are available from which to make such payment.

Violation of any standard or restrictive provision by the borrower gives the lender the right to do all of the following EXCEPT

________ are bonds that have a short maturity, typically one to five years, and which can be redeemed or renewed for a similar period at the option of their holders.

Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.

On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

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

Any bond rated according to Moody's Caa through Aaa would be considered investment grade debt.