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Question;[i]. The market value of any;real or financial asset, including stocks, bonds, or art work, may be found by;determining future cash flows and then discounting them back to the present.;a. True;b. False;[ii]. If a firm raises capital by;selling new bonds, the buyer is called the "issuing firm," and the;coupon rate is generally set equal to the required rate.;a. True;b. False;[iii]. A 20-year original maturity;bond with 1 year left to maturity has more interest rate risk than a 10-year;original maturity bond with 1 year left to maturity. (Assume that the bonds;have equal default risk and equal coupon rates.);a. True;b. False;[iv]. Because short-term interest;rates are much more volatile than long-term rates, you would, in the real;world, be subject to much more interest rate risk if you purchased a 30-day;bond than if you bought a 30-year bond.;a. True;b. False;[v]. For bonds, price;sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.;a. True;b. False;[vi]. Typically, debentures have;higher interest rates than mortgage bonds primarily because the mortgage bonds;are backed by assets while debentures are unsecured.;a. True;b. False;[vii]. Other things equal, a firm;will have to pay a higher coupon rate on a subordinated debenture than on a;second mortgage bond.;a. True;b. False;[viii]. A call provision gives;bondholders the right to demand, or "call for," repayment of a;bond. Typically, calls are exercised if;interest rates rise, because when rates rise the bondholder can get the;principal amount back and reinvest it elsewhere at higher rates.;a. True;b. False;[ix]. Many bond indentures allow;the company to acquire bonds for a sinking fund either by purchasing bonds in;the market or by a lottery administered by the trustee for the purchase of a;percentage of the issue through a call at face value.;a. True;b. False;[x]. A zero coupon bond is a;bond that pays no interest and is offered (and subsequently sells) at par;therefore providing compensation to investors in the form of capital;appreciation.;a. True;b. False;Floating rate debt;[xi]. The motivation for floating;rate bonds arose out of the costly experience of the early 1980s when inflation;pushed interest rates to very high levels causing sharp declines in the prices;of long-term bonds.;a. True;b. False;[xii]. A junk bond is a high risk;high yield debt instrument typically used to finance a leveraged buyout or a;merger, or to provide financing to a company of questionable financial;strength.;a. True;b. False;[xiii]. There is an inverse;relationship between bond ratings and the required return on a bond. The required return is lowest for AAA-rated;bonds, and required returns increase as the ratings get lower.;a. True;b. False;Medium;[xiv]. If the required rate of;return on a bond is greater than;its coupon interest rate (and rd remains above the coupon rate), the;market value of that bond will always be below;its par value until the bond matures, at which time its market value will equal;its par value. (Accrued interest between;interest payment dates should not be considered when answering this question.);a. True;b. False;[xv]. You have just noticed in;the financial pages of the local newspaper that you can buy a $1,000 par value;bond for $800. If the coupon rate is 10;percent, with annual interest payments, and there are 10 years to maturity, you;should make the purchase if your re?quired return on investments of this type;is 12 percent.;a. True;b. False;[xvi]. The prices of high-coupon;bonds tend to be less sensitive to a given change in interest rates than;low-coupon bonds, other things equal and held constant.;a. True;b. False;[xvii]. A bond with a $100 annual;interest payment with five years to maturity (not expected to default) would;sell for a premium if interest rates were below 9 percent and would sell for a;discount if interest rates were greater than 11 percent.;a. True;b. False;stated term to maturity.;Therefore, if the yield curve is upward sloping, an outstanding callable;bond should have a lower yield to maturity than an otherwise identical;noncallable bond.;a. True;b. False;increases the value of the bond increases and the issuer is;responsible for the accumulated value which may become much greater than the;original face value.;a. True;b. False;[xviii]. Income bonds pay interest;only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a;company and this makes them safer than regular bonds.;a. True;b. False;[xix]. Restrictive covenants are;designed so as to protect both the bondholder and the issuer even though they;may constrain the actions of the firm's managers. Such covenants are contained in the bond's;indenture.;a. True;b. False;[xx]. You are considering two;bonds. Both are rated double A (AA);both mature in 20 years, both have a 10 percent coupon, and both are offered to;you at their $1,000 par value. However;Bond X has a sinking fund;while Bond Y does not. This is probably;not an equilibrium situation, as Bond X, which has the sinking fund, would;generally be expected to have a higher;yield than Bond Y.;a. True;b. False;[i]. Floating rate debt is;advantageous to investors because the interest rate moves up if market rates;rise. Floating rate debt shifts interest;rate risk to companies and thus has no advantages for issuers.;a. True;b. False;[ii]. A firm with a low bond;rating faces a more severe penalty when the Security Market Line (SML) is;relatively steep than when it is not so steep.;a. True;b. False.

 

Paper#44682 | Written in 18-Jul-2015

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