Question 1

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 2

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 3

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

Accepted Answer

Junk bonds are bonds that are rated below investment grade, typically rated as Ba or lower by credit rating agencies such as Moody's or Standard & Poor's. They are considered riskier and more likely to default than investment-grade bonds. A junk bond may or may not be currently paying interest and may or may not have been downgraded by Moody's.

Question 4

Equipment trust certificates are used mainly by

Accepted Answer

Equipment trust certificates are most commonly used by the railroad and airline industries, as well as trucking companies, to finance the purchase of expensive equipment such as locomotives, airplanes, and trucks.

Question 5

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

According to the basic relationship in bond valuation, for a given percentage point change in the required rate of return, the longer the time to maturity, the greater the change in value. Therefore, choice C, longer time to maturity and greater change in value, is the correct answer.

Question 6

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 commonly known as "funding short-term debt." It allows companies to manage their short-term financing needs and shift to more stable long-term financing. This not only helps in lowering the interest costs but also provides financial stability to the company.

Question 7

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

Accepted Answer

The relationship between the value of a bond and its required rate of return is inverse. As the required rate of return increases, the present value of the bond's future cash flows decreases, leading to a lower bond value. Conversely, as the required rate of return decreases, the present value of the bond's future cash flows increases, leading to a higher bond value.

Question 8

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

Accepted Answer

The answer of The major advantages of long-term debt include...

Question 9

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

A 15-year bond has a longer time to maturity compared to a 5-year bond, which means that its cash flows are spread over a longer period of time. Therefore, changes in the required rate of return will have a greater impact on the present value of the cash flows for the 15-year bond, making it more sensitive to interest rate changes. Hence, the value of a 15-year bond will change more for a given change in the required rate of return than the value of a 5-year bond.

Question 10

All of the following types of bonds are secured except

Accepted Answer

Collateral trust bonds, mortgage bonds, and equipment trust certificates are all examples of secured bonds, as they are backed by some form of collateral. However, debentures are unsecured bonds, meaning they are not backed by any specific asset or collateral.

Question 11

____ are not secured by specific assets.

Accepted Answer

Debentures are a type of bond that is not backed by specific assets or collateral.

Question 12

Which of the following is the highest risk debt issue?

Accepted Answer

Debentures are unsecured debt issues that do not have any collateral backing them up, making them the highest risk debt issue. Senior debt and mortgage bonds, on the other hand, are typically secured by specific assets, while equipment trust certificates are backed by the equipment being financed.

Question 13

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 14

The ____ represents the debtholders in dealings with the issuing company.

Accepted Answer

A trustee is typically appointed to represent the interests of debtholders, ensuring the issuing company meets its obligations in terms of paying interest and principal on time. The trustee is responsible for enforcing the terms of the indenture that governs the bond issuance, and acts on behalf of investors in the event of default or other problems. Stakesholders, brokers, and investment bankers may have roles to play in the bond issuance process, but the trustee specifically represents the interests of debtholders.

Question 15

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

Accepted Answer

Junk bonds are typically rated below investment grade, which means they have a relatively high risk of default. Moody's rates these bonds based on their credit risk, with lower ratings indicating higher risk. Baa and BBB ratings are above junk bond status, indicating a higher level of creditworthiness. Ba and CCC ratings represent lower grades of creditworthiness, indicating a higher likelihood of default. Thus, the correct choice for junk bonds would be C) Ba and D) CCC.

Question 16

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 adjust for the impact of inflation on the value of the investment. This allows the investor to maintain their purchasing power over time. The other features listed do not provide protection against inflation.

Question 17

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 level of risk associated with the asset and the risk-free interest rate. In other words, investors demand a higher return for taking on more risk, but they also consider the prevailing risk-free rate when setting their expected return. The age of the asset does not play a role in determining the required rate of return.

Question 18

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 answer of If an American Water Company bond has...

Question 19

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 20

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.

Quiz 6: Fixed Income Securities: Characteristics and Valuation