Question 1

Interest rate risk and the time to maturity have a relationship that is best characterized as

Accepted Answer

A)  constant. 
B)  varying. 
C)  direct. 
D)  inverse.

Question 2

Standard debt provisions specify certain criteria of satisfactory record keeping and reporting, tax payment, and general business maintenance on the part of the lending firm.

Accepted Answer

A) True 
 B)False

Question 3

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

Accepted Answer

A) True 
 B)False

Question 4

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

Accepted Answer

A) True 
 B)False

Question 5

The three theories cited to explain the general shape of the yield curve are all of the following EXCEPT

Accepted Answer

A)  expectations hypothesis. 
B)  market segmentation theory. 
C)  liquidity preference theory. 
D)  security markets theory.

Question 6

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to

Accepted Answer

A)  protect the lender by controlling the risk and marketability of the borrower's security investment alternatives. 
B)  limit the amount of fixed-payment obligations. 
C)  ensure a cash shortage does not cause an inability to meet current obligations. 
D)  prevent the firm from liquidation, acquisition, or encumbrance of capital assets.

Question 7

________ is secured by real estate.

Accepted Answer

A)  An income bond 
B)  A debenture 
C)  A mortgage bond 
D)  A subordinated debenture

Question 8

What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?

Accepted Answer

A)  $604 
B)  $1,090 
C)  $1,060 
D)  $1,073

Question 9

Since a putable bond gives its holder the right to "put the bond" at specified times or because of specified actions by the issuing firm, the bond's yield would be lower than that of an otherwise equivalent non-putable bond.

Accepted Answer

A) True 
 B)False

Question 10

Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

Accepted Answer

The answer of Gong Li has recently inherited $10,000 and...

Question 11

The nominal rate of interest is the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders have no liquidity preference and all outcomes are certain.

Accepted Answer

A) True 
 B)False

Question 12

Tangshan Coal, Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest semiannually.
(a) How much can the investor expect in annual interest (in dollars)?
(b) How much can the investor expect in interest every six months (in dollars)?
(c) How much can the investor expect in par value at the end of the 25th year?

Accepted Answer

The answer of Tangshan Coal, Inc. just issued a 10...

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

High-risk, high-yield junk bonds have declined in popularity over time due to

Accepted Answer

A)  the decline in mergers and takeovers, which these bonds were used to finance. 
B)  the declining need of growth capital. 
C)  the stabilizing of interest rates. 
D)  a number of major defaults on these bonds.

Question 15

Generally, long-term loans have higher interest rates than short-term loans because of

Accepted Answer

A)  the general expectation of higher future rates of inflation. 
B)  lender preferences for shorter-term, more liquid loans. 
C)  greater demand for long-term rather than short-term loans relative to the supply of such loans. 
D)  all of the above.

Question 16

The ________ rate of interest is typically the required rate of return on a three-month U.S. Treasury bill.

Accepted Answer

A)  nominal 
B)  real 
C)  risk-free 
D)  premium

Question 17

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.

Accepted Answer

A)  at a premium; at a discount; equal to the par value 
B)  at a premium; equal to the par value; at a discount 
C)  at a discount; at a premium; equal to the par value 
D)  equal to the par value; at a premium; at a discount

Question 18

________ of all future cash flows an asset is expected to provide over a relevant time period is the market value of the asset.

Accepted Answer

A)  The future value 
B)  The present value 
C)  The stated value 
D)  The sum

Question 19

At any time, the slope of the yield curve is affected by

Accepted Answer

A)  inflationary expectations. 
B)  liquidity preferences. 
C)  the comparative equilibrium of supply and demand in the short-term and long-term market segments. 
D)  all of the above.

Question 20

Generally, an increase in risk will result in ________ required return or interest rate.

Accepted Answer

A)  a lower 
B)  a higher 
C)  an unchanged 
D)  an undetermined

Exam 6: Interest Rates and Bond Valuation

Interest rate risk and the time to maturity have a relationship that is best characterized as

Standard debt provisions specify certain criteria of satisfactory record keeping and reporting, tax payment, and general business maintenance on the part of the lending firm.

Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.

A downward-sloping yield curve indicates generally cheaper short-term borrowing costs than long-term borrowing costs.

The three theories cited to explain the general shape of the yield curve are all of the following EXCEPT

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to

________ is secured by real estate.

What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?

Since a putable bond gives its holder the right to "put the bond" at specified times or because of specified actions by the issuing firm, the bond's yield would be lower than that of an otherwise equivalent non-putable bond.

Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

The nominal rate of interest is the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders have no liquidity preference and all outcomes are certain.

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

High-risk, high-yield junk bonds have declined in popularity over time due to

Generally, long-term loans have higher interest rates than short-term loans because of

The ________ rate of interest is typically the required rate of return on a three-month U.S. Treasury bill.

A bond will sell when the stated rate of interest exceeds the required rate of return, when the stated rate of interest is less than the required return, and when the stated rate of interest is equal to the required return.

________ of all future cash flows an asset is expected to provide over a relevant time period is the market value of the asset.

At any time, the slope of the yield curve is affected by

Generally, an increase in risk will result in ________ required return or interest rate.