Essentials of Corporate Finance 9th Edition Ross TB

Essentials of Corporate Finance 9th Edition Ross TB

Chapter 06 Test Bank – Static
Student: ___________________________________________________________________________

1. What condition must exist if a bond’s coupon rate is to equal both the bond’s current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

A. The clean price of the bond must equal the bond’s dirty price.
B. The bond must be a zero coupon bond and mature in exactly one year.
C. The market price must exceed the par value by the value of one year’s interest.
D. The bond must be priced at par.
E. There is no condition under which this can occur.

2. What is the principal amount of a bond that is repaid at the end of the loan term called?

A. Coupon
B. Market price
C. Accrued price
D. Dirty price
E. Face value

3. A bond’s annual interest divided by its face value is referred to as the:

A. market rate.
B. call rate.
C. coupon rate.
D. current yield.
E. yield-to-maturity.

4. On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

A. A portion of the principal is repaid on each coupon date.
B. The entire bond is repaid on the issue date.
C. Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date.
D. The entire bond is repaid on the maturity date.
E. Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date.

5. The market-required rate of return on a bond that is held for its entire life is called the:

A. coupon rate.
B. yield to maturity.
C. dirty yield.
D. call premium.
E. current yield.

6. The current yield on a bond is equal to the annual interest divided by the:

A. issue price.
B. maturity value.
C. face amount.
D. current market price.
E. current par value.

7. The written agreement that contains the specific details related to a bond issue is called the bond:

A. indenture.
B. debenture.
C. document.
D. registration statement.
E. issue paper.

8. A registered-form bond is defined as a bond that:

A. is a bearer bond.
B. is held in street name.
C. pays coupon payments directly to the owner of record.
D. is listed with the Securities and Exchange Commission (SEC).
E. is unsecured.

9. This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following?

A. Debenture
B. Note
C. Registered-form bond
D. Bearer-form bond
E. Callable bond

10. Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

A. note.
B. bearer form bond.
C. debenture.
D. registered form bond.
E. call protected bond.

11. What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

A. Registered account
B. Bearer account
C. Call account
D. Sinking fund
E. Premium fund

12. A call provision grants the bond issuer the:

A. right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.
B. option to exchange the bonds for equity securities.
C. right to automatically extend the bond’s maturity date.
D. right to repurchase the bonds on the open market prior to maturity.
E. option of repurchasing the bonds prior to maturity at a prespecified price.

13. The call premium is the amount by which the:

A. market price exceeds the par value.
B. market price exceeds the call price.
C. face value exceeds the market price.
D. call price exceeds the par value.
E. call price exceeds the market price.

14. Russell’s has a bond issue outstanding. The issue’s indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision.

A. safeguard
B. market
C. liquidity
D. deferred call
E. sinking fund

15. Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

A. subject to a sinking fund provision.
B. a debenture.
C. a “fallen angel.”
D. call protected.
E. unrated.

16. A protective covenant:

A. protects the borrower from unscrupulous practices by the lender.
B. guarantees the interest and principal payments will be paid in full on a timely basis.
C. prevents a bond from being called.
D. limits the actions of the borrower.
E. guarantees the market price of a bond will never be less than par value.

17. A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as:

A. called bonds.
B. converted bonds.
C. unprotected bonds.
D. fallen angels.
E. floaters.

18. Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

A. Callable
B. Income
C. Zero coupon
D. Convertible
E. Tax-free

19. The price at which a dealer will purchase a bond is referred to as the _____ price.

A. asked
B. face
C. call
D. put
E. bid

20. The price at which an investor can purchase in the bond market is called the _____ price.

A. asked
B. coupon
C. call
D. face
E. bid

21. A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

A. market yield.
B. yield-to-call.
C. bid-ask spread.
D. current yield.
E. bond premium.

22. Which one of the following is the quoted price of a bond?

A. Par value
B. Discount price
C. Face value
D. Dirty price
E. Clean price

23. Which one of the following is the price that an investor pays to purchase an outstanding bond?

A. Dirty price
B. Face value
C. Call price
D. Bid price
E. Clean price

24. A real rate of return is defined as a rate that has been adjusted for which one of the following?

A. Inflation
B. Interest rate risk
C. Taxes
D. Liquidity
E. Default risk

25. The rate of return an investor earns on a bond prior to adjusting for inflation is called the:

A. nominal rate.
B. real rate.
C. dirty rate.
D. coupon rate.
E. clean rate.

26. The relationship between nominal returns, real returns, and inflation is referred to as the:

A. call premium.
B. Fisher effect.
C. conversion ratio.
D. spread.
E. current yield.

27. The term structure of interest rates represents the relationship between which of the following?

A. Nominal rates on risk-free and risky bonds
B. Real rates on risk-free and risky bonds
C. Nominal and real rates on default-free, pure discount bonds
D. Market and coupon rates on default-free, pure discount bonds
E. Nominal rates on default-free, pure discount bonds and time to maturity

28. The inflation premium:

A. increases the real return.
B. is inversely related to the time to maturity.
C. remains constant over time.
D. rewards investors for accepting interest rate risk.
E. compensates investors for expected price increases.

29. Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

A. Taxability risk premium
B. Default risk premium
C. Interest rate risk premium
D. Real rate of return
E. Bond premium

30. The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.

A. face value
B. market price
C. maturity
D. coupon rate
E. issue date

31. Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium

32. Which one of the following premiums is paid on a corporate bond due to its tax status?

A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium

33. Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

A. Interest rate risk premium
B. Inflation premium
C. Liquidity premium
D. Taxability premium
E. Default risk premium