Question 1

There is a(n) relationship between the value of a bond and its required rate of return.

Accepted Answer

There is an inverse relationship between the value of a bond and its required rate of return. As the required rate of return goes up, the present value of future cash flows (i.e. the bond's value) goes down. This is because investors demand a higher return to compensate for the increase in risk associated with the higher required rate of return. Conversely, if the required rate of return goes down, the bond's value will increase.

Question 2

The required rate of return on an asset is a function of the .

Accepted Answer

The required rate of return on an asset is determined by both the risk-free interest rate and the risk associated with the asset, as it compensates investors for the time value of money and the risk taken.

Question 3

Junk bonds (i.e., bonds issued by companies with weak financial positions) are rated or lower by Moody's.

Accepted Answer

According to Moody's rating system, junk bonds are rated Ba or lower. Therefore, the best choice is C since it is the only option that includes a rating of Ba.

Question 4

The represents the debtholders in dealings with the issuing company.

Accepted Answer

The trustee represents the interests of debtholders by ensuring that the issuing company follows the terms of the bond or debt contract, including making payments to the debtholders on time. The trustee acts as an intermediary between the debtholders and the issuing company to protect the interests of the debtholders. Stakeholders can include a variety of groups or individuals who have an interest in the success of a company, including employees, customers, suppliers, and shareholders. Brokers and investment bankers may also be involved in debt or bond issuances, but they do not specifically represent the interests of debtholders.

Question 5

____ are not secured by specific assets.

Accepted Answer

Debentures are unsecured bonds, meaning they are not backed by specific assets such as equipment, real estate, or inventory. Instead, the bondholders rely solely on the issuer's ability to make payments from its general funds.

Question 6

If an American Water Company bond has a coupon rate of 9.0 percent and is selling for $920, then the yield to maturity must be:

Accepted Answer

The bond is selling for less than its face value (at a discount), which means the yield to maturity must be greater than the coupon rate of 9%.

Question 7

The value of a 15-year bond will change for a given change in the required rate of return than the value of a 5 year bond.

Accepted Answer

The value of a bond is inversely related to the required rate of return. Thus, a given change in the required rate of return will have a greater effect on the value of a 15-year bond than on the value of a 5-year bond. This is because the longer maturity of the 15-year bond exposes it to greater interest rate risk.

Question 8

The major advantages of long-term debt include all the following except:

Accepted Answer

Decrease in financial risk is not an advantage of long-term debt.

Question 9

Preferred stock has a priority over common stock with regard to the company's

Accepted Answer

The answer of Preferred stock has a priority over common...

Question 10

Which of the following features (if any) of preferred stock provides the investor with a measure of protection against inflation?

Accepted Answer

An adjustable dividend rate provides the investor with a measure of protection against inflation as the dividend rate can be increased to keep up with inflation. Cumulative feature means if a company skips the dividend payment in one quarter, the preferred stockholder will receive the payment and after-tax cost is about the tax paid on dividends. A call feature is the right of the issuer to redeem the stock before its maturity. None of these features provide protection against inflation.

Question 11

The principal disadvantage of preferred stock financing is

Accepted Answer

Preferred stock often has a higher after-tax cost compared to long-term debt because dividend payments are not tax-deductible, unlike interest payments on debt.

Question 12

"Junk bond" is a term used to describe a bond that

Accepted Answer

A "junk bond" is a bond that is rated Ba or lower by credit rating agencies such as Moody's or Standard & Poor's. These bonds are considered to have a high risk of default and are often issued by companies with poor credit histories. The fact that the bond is currently paying interest or has been downgraded by Moody's does not necessarily make it a junk bond.

Question 13

The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the the time to maturity, the the change in value.

Accepted Answer

For bonds, the longer the time to maturity, the greater the sensitivity of the bond's price to changes in interest rates, meaning a given change in the required rate of return will result in a larger change in value.

Question 14

The call feature is an advantage to the issuing firm

Accepted Answer

If interest rates decline, the issuing firm can call the bond and reissue new bonds at a lower interest rate, thereby reducing its cost of borrowing. This is the main advantage of the call feature for the issuing firm. If interest rates increase, the call feature would be a disadvantage for the issuing firm since it would have to pay a higher interest rate to reissue new bonds. The par value or floating rate of the bond do not necessarily affect the advantage of the call feature.

Question 15

A zero coupon bond is an example of a(n) .

Accepted Answer

A zero coupon bond is a type of fixed income security that is also classified as an original issue deep discount bond. It is called a discount bond because it is initially sold at a discount to its face value and does not make periodic interest payments ("zero coupon"), but rather pays out a lump sum at maturity.

Question 16

When the required rate of return is the coupon rate, the bond will sell at a discount.

Accepted Answer

The answer of When the required rate of return is...

Question 17

Large companies build up short-term debt over the period of 1 to 2 years, then sell long-term debt using a portion of the proceeds to repay the short-term borrowings.This procedure is called:

Accepted Answer

This procedure is referred to as funding short-term debt. Companies use the proceeds from the sale of long-term debt to retire short-term debt, thereby avoiding the risk of having to continuously roll over short-term debt.

Question 18

Equipment trust certificates are used mainly by

Accepted Answer

Equipment trust certificates are usually used by trucking companies to finance the purchase of vehicles and other equipment used in their operations. These certificates offer a secure and low-cost financing option for the companies, with the equipment serving as collateral for the loan.

Question 19

All of the following types of bonds are secured except

Accepted Answer

Debentures are unsecured bonds and are not backed by any collateral or assets. Collateral trust, mortgage, and equipment trust certificates are all secured bonds that are backed by specific assets or collateral.

Question 20

Which of the following is the highest risk debt issue?

Accepted Answer

Debentures are unsecured bonds and therefore carry the highest risk for investors as there is no collateral backing the debt issue. Senior debt, mortgage bonds, and equipment trust certificates are all secured debt issues, meaning they have collateral to back the debt and therefore carry lower risk than debentures.

Quiz 6: Fixed-Income Securities: Characteristics and Valuation