UTD FIN Exam 3 Mace - WIP FOR FINAL

Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue of face value $1,000 to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for five years. Then, interest payments will be resumed for the next five years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first five years will be paid. However, no interest will be paid on the deferred interest. If the required return is 20 percent, what should the bonds sell for in the market today?

$362.44

Which of the following statements is true about a zero coupon bond?

A zero coupon bond is issued at a substantial discount below its par value.

When the market value of debt is the same as its face value, it is said to be selling at the _____.

par value

Stephanie purchased a corporate bond that matures in three years. The bond has a coupon interest rate of 9 percent and its yield to maturity is 6 percent. If market interest rates remain constant and Stephanie sells the bond in 12 months, her capital gain from holding the bond will be _____.

negative because she purchased the bond at a premium and the bond price will approach its face value as it nears its maturity

Which of the following bonds pays interest based on an inflation index?

Purchasing power bonds

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent, how much should the investor be willing to pay for this bond?

$1,115.57

A(n) _____ certificate of deposit (CD) can be traded to other investors prior to maturity.

negotiable

The two principal types of municipal bonds are _____.

revenue bonds and general obligation bonds

Banks that need additional funds to meet the reserve requirements of the Federal Reserve _____.

borrow from banks with excess reserves

A bond's principal value is also referred to as the maturity value because it is _____.

repaid at the maturity date

Which of the following is generally considered an advantage of term loans over corporate bonds?

Speed, or how long it takes to bring the issue to the market

Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. Which of the following is the annual coupon interest rate?

4%

A certificate of deposit represents a _____.

savings time deposit at a bank or other financial intermediary

The par value of debt _____.

must be repaid at some point during the life of the debt

The par value of debt is the _____.

amount owed to the lender

Which of the following equations is used to compute the percentage rate of return on a bond?

Percentage rate of return on a bond = Current yield + Capital gains yield

The percentage rate of return that investors earn on a bond consists of a(n) _____.

interest yield plus a capital gains yield

If a bond's yield to maturity exceeds its coupon rate, the bond's _____.

price must be less than its par value

Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond.

$841.15

Per Standard & Poor's Corporation (S&P), a bond whose rating is BBB is considered _____.

investment grade with medium investment risk

Which of the following ratings by Standard & Poor's (S&P) is given to speculative bonds with extremely high credit risk?

CCC

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

subordinated debenture

A sinking fund call on a bond _____.

does not require the company to pay a call premium

Federal funds represent _____.

loans from one bank to another bank

Assume that an investor wishes to purchase a 20-year bond with a maturity value of $1,000 and semiannual interest payments of $40. If the investor requires a 10 percent simple yield to maturity on this investment, what is the maximum price she should be willing to pay for the bond?

$828

The greater a bond's default risk, the greater the _____.

default risk premium (DRP) associated with the bond

The average rate of return earned on a callable bond if it is held until the first call date is the _____.

yield to call

Which of the following statements is true of a bond?

The maturity date of a bond is contractually fixed.

Lower-rated bonds offer higher returns than higher-grade bonds because their _____.

risks are higher

The conversion feature of a bond permits a _____.

bondholder to exchange his or her bonds for the company's common stock

A call provision for the redemption of a bond _____.

allows the firm to refinance debt

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's _____.

yield to maturity

A contract that is negotiated directly between a borrowing firm and a bank and under which the borrower agrees to make a series of interest and principal payments to the bank on specific dates is called _____.

a term loan

Commercial paper is a type of _____.

promissory note

An increase in interest rates will help increase the future value of a portfolio because the cash flows produced by the portfolio _____.

can be reinvested at higher rates of return

JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years and a par value of $1,000 and pay $40 interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise additional capital of $2 million? Fractions of bonds cannot be issued.

2,596

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond?

$550

Which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk?

Aaa

A debt is said to be selling at par when the _____.

market value is equal to the face value of the debt

When liquidating a traditional certificate of deposit (CD) prior to maturity, the owner must _____.

return it to the issuing institution

Which of the following types of investors would be most likely to purchase zero coupon bonds?

Tax-free institutional investors such as pension funds

The face value of a debt is _____.

the principal value written on the face, or outside cover, of a debt contract

Which of the following statements is correct?

If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will sell at a premium.

For installment loans, the maturity date is the date on which the _____.

last installment repayment of the principal amount is due

An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?

$875.38

A bond that pays no annual interest but is sold at a discount below its par value is called a _____.

zero coupon bond

The maturity of commercial paper varies from _____.

1 to 9 months

The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the bondholders will _____.

earn a lower return on the reinvested cash flows

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called _____.

interest rate reinvestment risk

The ratings of a firm's bonds are based on _____.

no precise formula

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be _____.

selling at a premium; i.e., the bond's market price should be greater than its face value

If Standard & Poor's ratings of a firm's bonds is below BBB, the _____.

firm will find it difficult to find potential investors when issuing new bonds

Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds?

9.2%

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

sinking fund

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond?

$1,207.57

Inputs: N = 60; I = 3; PMT = 37.50; FV = 1,000

Output: PV = −$1,207.57

_____ bonds are often called by the firm prior to maturity.

Callable

Commercial paper is issued in denominations of _____.

$100,000 or more

Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30 interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of return to invest in this bond, what is the maximum price the investor should be willing to pay to purchase the bond?

$939.53

Inputs: N = 16; I = 3.5; PMT = 30; FV = 1,000; Output: PV = $939.53

The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7 percent. Which of the following is true of the value of the bond?

The value of the bond at 7 percent is $508.34.

The terms and conditions of a bond are set forth in its _____.

indenture

The quality rating assigned to a bond reflects the probability that the _____.

bond will go into default

Which of the following statements is true about federal funds?

Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.

The date on which the principal amount of a debt is due is the _____.

maturity date

Banks generally use the federal funds market to _____.

adjust their reserves

Which of the following is true of a traditional certificate of deposit (CD)?

Traditional CDs must be kept at the issuing institution for a specified time period.

A bond differs from a term loan in that a bond _____.

has a higher issuance cost

Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's _____.

cost of using such debt and thus the bond's interest rate

When the market value of debt is the same as its par value, it is _____.

selling at its face value

Which of the following types of bonds protects a bondholder against increases in interest rates?

Floating-rate bonds

A(n) _____ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion.

convertible

Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal $1,120. Currently, the bond is selling for $989.What is the bond's yield to call (YTC).

15.76%

At the time a bond is issued, the coupon rate on the bond is set at a level that will cause the _____.

issuing price to be equal the face (par) value of the bond

GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago. The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent, what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption?

$43,796

If interest rates decline, bondholders will earn _____.

a lower rate of return on reinvested cash flows

Which of the following is an advantage of convertible bonds?

Investors can choose to hold the company's bonds or convert the bonds into its common stock.

A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n) _____

putable bond

The indentures for publicly-traded bonds are approved by the _____.

Securities and Exchange Commission

A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n) _____.

putable bond

All else being equal, an increase in the yield to maturity of a bond will result in a(n) _____.

greater interest rate price risk on a long-term bond than on a short-term bond

Assuming other things are held constant, which of the following is correct?

The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods.

Which of the following statements about a bond that sells for its par value is correct?

As long as market rates remain constant, the bond's capital gains yield will equal to zero.

A _____ is assigned to represent the bondholders and to guarantee that the terms of the indenture are carried out.

trustee

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

lower than

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

6%

N = 20; PV = −1,297.58; PMT = 50; FV = 1,000

Output: I = 3.0% per six months; rd = YTM = 3.0% × 2 periods = 6%

Which of the following events would make it less likely for a company to choose to call its outstanding callable bonds?

An increase in interest rates

A bond that pays interest only when a firm has sufficient earnings to cover the interest payments is called a(n) _____.

income bond

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

11.26%

The Securities and Exchange Commission is required to verify that _____.

all previous indenture provisions have been met before allowing a company to sell new securities to the public

Revenue bonds are used to raise funds _____.

for projects that generate revenues that will contribute to payment of interest and the repayment of debt

Which of the following statements is true about commercial paper?

Commercial paper is issued at a discount.

Which of the following statements is true about foreign bonds?

Foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold.

A bond backed by tangible (real) assets is known as a _____.

mortgage bond

Omega Software Corporation's bond with a face value of $1,000 is currently selling at a premium in the financial markets. If the bond's yield to maturity is 11.5 percent, then the bond's _____.

coupon rate of interest must be greater than 11.5 percent

Which of the following statements about a bond that is selling at a discount is correct?

The market price of the bond will increase and will approach its face value as the maturity date gets closer.

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.

a discount

A bond sinking fund provision requires a firm to _____.

retire a portion of the bond issue each year

General obligation bonds are backed by the _____.

government's ability to tax its citizens

Changes in a firm's bond rating affect its ability to _____.

borrow long-term capital as well as the cost of such funds

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. From the given information, calculate the annual coupon rate on the bond.

17%

A change in market conditions causes the market price of a bond to change because of changes in the bond's _____.

yield to maturity