Missouri Southern State University

ECON 350

Financial Management

Chapter 6 Quiz

1)The                                     is the annual rate of interest earned on a security purchased on a given date and held to maturity.

1. 1. term structure
   2. yield curve
   3. risk-free rate

D) yield to maturity

 

2.                             yield curve reflects lower expected future rates of interest.
   1. An upward-sloping
   2. A flat

C) A downward-sloping

D) A linear

 

3. Generally, an increase in risk will result in                                     required return or interest rate.
   1. a lower

B) a higher

3. an unchanged
4. an undetermined

 

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

A) a normal yield curve.

2. an inverted yield curve.
3. a flat yield curve.
4. none of the above.

 

5. The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called
   1. the expectation hypothesis.

B) the liquidity preference theory.

3. the market segmentation theory.
4. none of the above.

 

6. All of the following are examples of long-term debt EXCEPT
   1. bonds.

B) lines of credit.

3. term loans.
4. debentures.

 

 

 

7. All of the following are examples of restrictive debt covenants EXCEPT
   1. a prohibition on selling accounts receivable.

B) supplying the creditor with audited financial statements.

3. a constraint on subsequent borrowing.
4. a prohibition on entering certain types of lease arrangements.

 

8. The                              feature allows the bondholder to change each bond into a stated number of shares of stock.
   1. call

B) conversion

3. put
4. capitalization

 

9. In the present value model, risk is generally incorporated into
   1. cash flows.
   2. the timing.

C) the discount rate.

D) the total value.

 

10. The                              value of a bond is also called its face value. Bonds which sell at less than face value are priced at                             , while bonds which sell at greater than face value sell at                                     .
    1. discount; par; a premium
    2. premium; a discount; par

C) par; a discount; a premium

D) coupon; a premium; a discount

 

11. 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
    1. Bond D will have a greater change in price.

B) Bond E will have a greater change in price.

3. the price of the bonds will be constant.
4. the price change for the bonds will be equal.

 

12. A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for                                    today.

A) $1,000

B) $716.67

C) $840.67 D) $1,123.33

13. What is the approximate yield to maturity for a $1000 par value bond selling for $1120 that matures in 6 years and pays 12 percent interest annually?
    1. 8.5 percent

B) 9.4 percent

3. 12.0 percent
4. 13.2 percent

 

14. What is the current price of a $1000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?

A) $604

B) $1090

C) $1060 D) $1073

 

15. The value of a bond is the present value of the
    1. dividends and maturity value.
    2. interest and dividend payments.
    3. maturity value.

D) interest payments and maturity value.