Fixed Income Securities: Characteristics And Valuation

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Question 1
Free
Multiple Choice

Which of the following types of debt securities protect investors against interest rate risk?

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A

floating rate bonds

B

extendible notes

C

original issue deep discount bonds

D

floating rate bonds and extendible notes

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Question 2
Free
Multiple Choice

Zero coupon bonds are an example of

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A

original issue deep discount bonds

B

extendible notes

C

convertible bonds

D

floating rate notes

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Question 3
Free
Multiple Choice

Original issue deep discount bonds have decreased in popularity over the last several years due to:

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A

changes in tax laws

B

issuance by brokerage firms of lower risk substitutes

C

increased interest in equity securities

D

changes in tax laws and issuance by brokerage firms of lower risk substitutes

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Question 4
Free
Multiple Choice

Extendable notes are redeemable at par at the option of the

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A

holder

B

company

C

trustee

D

holder and trustee

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Question 5
Free
Multiple Choice

If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at

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A

a rate less than 8%

B

8%

C

a rate greater than 8%

D

cannot be determined

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Question 6
Multiple Choice

When the market for an asset is in equilibrium, the expected rate of return on the asset is equal to the:

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A
risk-free rate
B
marginal investor's required rate of return
C
historical cost of capital
D
perpetual capitalization rate
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Question 7
Multiple Choice

The ____ the investor's required rate of return on a bond, the ____ will be the value of the bond to the investor.

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A
lower, higher
B
higher, higher
C
lower, lower
D
higher, lower
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Question 8
Multiple Choice

The value of a perpetual bond is equal to the annual interest payment divided by the:

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A
risk-free rate
B
required rate of return
C
bank interest rate
D
after-tax historical cost of capital
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Question 9
Multiple Choice

The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables except:

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A
the current price
B
the required rate of return on the bond
C
the uniform annual interest payments
D
the maturity value
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Question 10
Multiple Choice

Which of the following statements concerning preferred stocks is true?

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A
Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders.
B
Preferred stock dividends per share are normally increased as the earnings of the firm increase.
C
Preferred dividends per share are usually not cut or suspended unless the firm is faced with serious financial problems.
D
The par value of a stock is always the same as the initial selling price.
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Question 11
Multiple Choice

Rank in ascending order (lowest to highest) the relative risk associated with holding the preferred stock, common stock and bonds of a firm:

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A
preferred stock, bonds, common stock
B
bonds, common stock, preferred stock
C
common stock, preferred stock, bonds
D
bonds, preferred stock, common stock
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Question 12
Multiple Choice

Potential sellers of an asset can be represented as a ____ schedule showing the ____ prices at which they are willing to sell given quantities of the asset.

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A
supply, maximum
B
demand, maximum
C
supply, minimum
D
supply, average
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Question 13
Multiple Choice

By the capitalization-of-cash flows method, the value of an asset is a function of

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A
the book value of the asset
B
the risk of the asset's cash flows
C
the age of the asset
D
both the book value and the age of the asset
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Question 14
Multiple Choice

Which of the following is not a characteristic of long- term debt?

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A
interest paid to bond holders is a tax-deductible expense to the firm
B
firm is not legally required to pay interest to bond-holders
C
usually has a specific maturity
D
all of the above are characteristics of long-term debt
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Question 15
Multiple Choice

The quality of a debenture depends on the

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A
general credit-worthiness of the issuing company
B
value of the assets used as collateral
C
the coupon rate of the debenture
D
length of time to maturity
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Question 16
Multiple Choice

The indenture is a contract between the issuer and lenders that does all the following except:

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A
specifies the manner in which the principal must be repaid
B
details the nature of the debt issue
C
gives management's expectations about return of the proceeds
D
lists any restrictive covenants
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Question 17
Multiple Choice

The call feature of a long-term bond

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A
is an optional retirement provision
B
states the call price
C
allows the issuer to replace a high coupon bond with one with a lower coupon bond
D
all the above are correct
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Question 18
Multiple Choice

A sinking fund allows the issuer to

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A
redeem an entire debt issue prior to maturity
B
purchase a portion of the debt each year in the open market or call a portion of the debt for mandatory redemption
C
call the entire debt issue
D
accumulate interest expenses into a sinking fund account
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Question 19
Multiple Choice

Normally the coupon rates on new bonds

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A
do not change over the life of the issue
B
are set equal to the market rate plus an inflation premium
C
float with changes in the prime rate
D
are set just over the prevailing prime rate
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Question 20
Multiple Choice

Junk bonds are

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A
usually rated Ba or higher
B
are issued by firms with a high debt ratio
C
issued with coupon rates at least 8 percentage points or more above the highest quality issues
D
are issued by firms with a low debt ratio
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