Bond Buyback Feature

The risk premium over and above the risk free rate consists of a number of components, including all of the following EXCEPT A) inflation risk. B) default risk. C) liquidity risk. D) tax treatment risk. 2) At any time, the slope of the yield curve is affected by A) liquidity preferences. B) inflationary expectations. C) the comparative equilibrium of supply and demand in the short-term and long-term market segments. D) all of the above. 3) Nico Nelson, a management trainee at a large New York-based bank is trying to estimate the real rate of return expected by investors.

He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent? A) 1% B) 5% C) 2% D) 3% 4) A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity. A) sinking-fund requirement B) conversion feature C) subordination clause D) redemption clause 5) A ________ is a complex and lengthy legal document stating the conditions under which a bond has been issued.

A) warrant B) sinking fund C) bond indenture

D) bond debenture 6) ________ is a paid individual, corporation, or commercial bank trust department that acts as a third party to a bond indenture to ensure that the issuer does not default on its contractual responsibilities to the bondholders. A) A trustee B) A bond rating agency C) A bond issuer D) An investment banker 7) All of the following are examples of restrictive debt covenants EXCEPT A) constraint on subsequent borrowing.

Get quality help now

Prof. Finch

Verified

Proficient in: Economics

4.7 (346)

“ This writer never make an mistake for me always deliver long before due date. Am telling you man this writer is absolutely the best. ”

+84 relevant experts are online

Hire writer

B) prohibition on selling accounts receivable. C) prohibition on entering certain types of lease arrangements. D) supplying the creditor with audited financial statements. 8)

The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to A) ensure that certain key employees are maintained. B) ensure a cash shortage does not cause an inability to meet current obligations. C) limit the amount of fixed-payment obligations. D) protect the lender by maintaining its position in the priority of claims in the event of liquidation. 11) ________ is a stipulation in a long-term debt agreement that subsequent or less important creditors agree to wait until all claims of the ________ are satisfied before having their claims satisfied.

A) The combination restriction; senior debt B) The senior debt; common stockholders C) Subordination; senior debt D) Subordination; common stockholders 9) To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically A) reserves the right to change the terms of the loan at any time. B) includes excessively restrictive debt provisions. C) charges a higher interest rate on long-term loans. D) reserves the right to demand immediate payment at any time. 0) The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity. A) put B) capitalization C) call D) conversion 11) ________ became popular vehicle used to finance mergers and takeovers during the 1980s. A) Convertible debentures B) Income bonds C) Floating rate bonds D) Junk bonds 12) ________ are bonds that have a short maturity, typically one to five years, and which can be redeemed or renewed for a similar period at the option of their holders. A) Extendible notes B) Putable bonds C) Floating rate bonds D) Junk bonds 13)

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) conversion feature. C) call feature. D) none of the above. 14) 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) conversion feature. B) call feature. C) Stock purchase warrants. D) none of the above 15) High-risk, high-yield junk bonds have declined in popularity over time due to A) he decline in mergers and takeovers, which these bonds were used to finance. B) a number of major defaults on these bonds. C) the stabilizing of interest rates. D) the declining need of growth capital. 21) ________ of all future cash flows an asset is expected to provide over a relevant time period is the market value of the asset. A) The stated value B) The future value C) The sum D) The present value 16) The ________ value of a bond is also called its face value. Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.

A) discount; par; premium B) premium; discount; par C) coupon; premium; discount D) par; discount; premium 17) The market price of outstanding issues often varies from par because A) the coupon rate has changed. B) the market rate of interest has changed. C) the maturity date has changed. D) old bonds sell for less than new bonds. 18) If the required return is less than the coupon rate, a bond will sell at A) a premium. B) a discount. C) book value. D) par. 19) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds.

If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold? A) $20,000 B) $18,880 C) $11,212 D) $12,393 E) $15,505 20) The yield to maturity on a bond with a price equal to its par value will A) be less than the coupon rate. B) be more or less than the coupon rate depending on the required return. C) be more than the coupon rate. D) always be equal to the coupon rate. 22) What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?

A) 13. 2 percent B) 8. 5 percent C) 9. 4 percent D) 12. 0 percent 23) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 13 percent B) 12 percent C) 11 percent D) 14 percent 24) Key differences between common stock and bonds include all of the following EXCEPT A) common stockholders have a voice in management; bondholders do not. B) dividends paid to bondholders are tax-deductible but interest paid to stockholders is not. C) onds have a stated maturity but stock does not. D) common stockholders have a junior claim on assets and income relative to bondholders. 25) The advantages of issuing preferred stock from the common stockholder’s perspective include all of the following EXCEPT A) flexibility. B) use in mergers. C) seniority of preferred stockholder’s claim over common stockholders. D) increased leverage. 26) Which of the following is false? A) A firm’s corporate charter indicates how many authorized shares it can issue. B) Preemptive rights help to prevent a dilution of ownership on the part of existing shareholders. C)

Firms often issue common stock with no par value. D) The common stock of a corporation can only be publicly owned. 27) Preferred stockholders A) do have preference over bondholders in the case of liquidation. B) do not have preference over common stockholders in the case of liquidation. C) do not have preference over bondholders in the case of liquidation. D) Two of the above are true statements. 28) Regarding the tax treatment of payments to securities holders, it is true that ________, while ________. A) interest and preferred stock dividends are not tax-deductible; common stock dividends are tax deductible B) nterest and preferred stock dividends are tax-deductible; common stock dividends are not tax-deductible C) common stock dividends and preferred stock dividends are not tax-deductible; interest is tax-deductible D) common stock dividends and preferred stock dividends are tax-deductible; interest is not tax-deductible 29) Common stockholders expect to earn a return by receiving A) fixed periodic dividends. B) annual interest. C) dividends. D) semiannual interest. 30) The disadvantages of issuing common stock versus long-term debt include all of the following EXCEPT A) the potential dilution of earnings.

B) the market perception that management thinks the firm is over-valued, causing a decline in stock price. C) no maturity date on which the par value of the issue must be repaid. D) high cost. 31) A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The accounting entry for the paid-in capital in excess of par account is A) $380,000. B) $800,000. C) $200,000. D) $400,000. 32) A firm has an expected dividend next year of $1. 20 per share, a zero growth rate of dividends, and a required return of 10 percent. The value of a share of the firm’s common stock is A) 10. B) $100. C) $12. D) $120. 33) A firm has an issue of preferred stock outstanding that has a par value of $100 and a 4% dividend. If the current market price of the preferred stock is $50, the yield on the preferred stock is A) 6. 00%. B) 8. 00%. C) 4. 00%. D) none of the above 34) Julian is considering purchasing the stock of Pepsi Cola because he really loves the taste of Pepsi. What should Julian be willing to pay for Pepsi today if it is expected to pay a $2 dividend in one year and he expects dividends to grow at 5 percent indefinitely? Julian requires a 12 percent return to make this investment.

A) $31. 43 B) $28. 57 C) $29. 33 D) $43. 14 35) Nico Corporation’s common stock currently sells for $180 per share. Nico just paid a dividend of $10. 18 and dividends are expected to grow at a constant rate of 6 percent forever. If the required rate of return is 12 percent, what will Nico Corporation’s stock sell for one year from now? A) $187. 04 B) $195. 40 C) $190. 80 D) $179. 84 36) ________ is the actual amount each common stockholder would expect to receive if the firm’s assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.

A) Liquidation value B) Book value C) The present value of the dividends D) The P/E multiple 37) The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested. A) risk B) value C) probability D) return 38) The ________ is a statistical measure of the relationship between series of numbers. A) standard deviation B) coefficient of variation C) correlation D) probability 39) The beta of the market A) is 1. B) is less than 1. C) is greater than 1. D) cannot be determined. 41) As risk aversion increases A) nvestors’ required rate of return will increase. B) a firm’s beta will increase. C) investors’ required rate of return will decrease. D) a firm’s beta will decrease. 42) In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by A) the risk-free rate. B) the difference between the security market line and the risk-free rate. C) the level of the security market line. D) the slope of the security market line. 43) The ________ is a weighted average of the cost of funds which reflects the interrelationship of financing decisions.

A) risk premium B) risk-free rate C) nominal cost D) cost of capital 44) The ________ is the firm’s desired optimal mix of debt and equity financing. A) market value B) book value C) cost of capital D) target capital structure 45) Debt is generally the least expensive source of capital. This is primarily due to A) the secured nature of a debt obligation. B) the tax deductibility of interest payments. C) fixed interest payments. D) its position in the priority of claims on assets and earnings in the event of liquidation. 46)

A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm’s marginal tax rate is 40 percent. The cost of the preferred stock is A) 9. 8 percent. B) 3. 9 percent. C) 10. 2 percent. D) 6. 1 percent. 47) The cost of retained earnings is A) zero. B) irrelevant to the investment/financing decision. C) equal to the cost of common stock equity. D) equal to the cost of a new issue of common stock. 48) One major expense associated with issuing new shares of common stock is A) nderpricing. B) registration fees. C) underwriting fees. D) legal fees. 49) Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is A) greater than the cost of new common stock equity. B) less than the cost of new common stock equity. C) equal to the cost of new common stock equity. D) not related to the cost of new common stock equity. 50) Generally the least expensive source of long-term capital is A) long-term debt. B) short-term debt. C) retained earnings. D) preferred stock.