51. The size of the loan and its issuance costs (as a
percentage of the amount borrowed) are
A) not related.
B) inversely related.
C) independent.
D) correlated.
52. A call feature is a feature included in all
corporate bonds and allows the issuer to repurchase bonds at the market price
prior to maturity.
53. There is an inverse relationship between
the quality or rating of a bond and the rate of return it must
provide bondholders
54. In a bond indenture, subordination is the
stipulation that subsequent creditors agree to wait until all claims of the
senior debt are satisfied.
55. Bondholders will convert their convertible bonds
into shares of stock only when the conversion price is greater than the market
price of the stock.
56. To sell a callable bond, the issuer must pay a
higher interest rate than on an otherwise equivalent noncallable bond
57. The conversion feature of a bond is a feature that
is included in all corporate bond issues that gives the issuer the opportunity
to repurchase bonds at a stated price prior to maturity.
58. 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.
59. 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.
60. In general, IBM bonds will experience less trading
activity (in terms of the number of bonds traded on a given day) compared to
IBM stock.
61. Any bond rated according to
Moody’s Caa through Aaa would be considered investment
grade debt
62. Any bond rated according to Moody’s Ba or
lower would be considered speculative or “junk
63. A feature that gives the issuer the opportunity to
repurchase bonds at a stated price prior to maturity is called
A) stock purchase warrants.
B) call feature.
C) conversion feature.
D) none of the above.
64. An instrument that give their holders the right to
purchase a certain number of shares of the firm’s common stock at a specified
price over a certain period of time is called
A) stock purchase warrants.
B) call feature.
C) conversion feature.
D) none of the above.
65. The riskiness of publicly traded bond issues is
rated by independent agencies. According to Moody’s rating system,
an Aaa bond and a Caa bond are ________ and ________,
respectively.
A) speculative; investment grade
B) prime quality; medium grade
C) prime quality; speculative
D) medium grade; lowest grade
66. A putable bond
gives the bondholder
A) the right to sell the bond back to the
corporation at the original purchase price.
B) the right to sell the bond back to the
corporation at a stated premium.
C) the right to sell the bond back to the
corporation at the current market value.
D) the right to sell the bond back to the
corporation at par.
67. 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?
68. A corporate financial analyst must calculate the
value of an asset which produces year-end annual cash flows of $0 the first year, $2,000
the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a
discount rate of 15 percent, what is the value of this asset?
69. What is the value of an asset which pays $200 a
year for the next 5 years and can be sold for $1,500 at the end of five years
from now? Assume that the opportunity cost is 10 percent.
70. When the required return is constant but different
from the coupon rate, the price of a bond as it approaches its maturity date
will
A) remain constant.
B) increase.
C) decrease.
D) approach par.
71. If the required return is greater than the coupon
rate, a bond will sell at
A) par.
B) a discount.
C) a premium.
D) book value.
72. The ABC company has two bonds outstanding
that are the same except for the maturity date. Bond D matures in 4 years,
while Bond E matures in 7 years. If the required return changes by 15 percent
A) Bond D will have a greater change in price.
B) Bond E will have a greater change in price.
C) the price of the bonds will be
constant.
D) the price change for the bonds will be
equal.
73. A firm has an issue of $1,000 par value bonds with
a 12 percent stated interest rate outstanding. The issue pays interest annually
and has 10 years remaining to its maturity date. If bonds of similar risk are
currently earning 8 percent, the firm’s bond will sell for ________ today.
A) $1,000
B) $805.20
C) $851.50
D) $1,268.20
74. 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?
A) 5.75%
B) 6.00%
C) 6.50%
D) 7.00%
75. To expand its business, the Kingston Outlet factory
would like to issue a bond with par value of $1,000, coupon rate of 10 percent,
and maturity of 10 years from now. What is the value of the bond if the
required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?
