WEEK 4

Question 1

GOVERMNETS issues

Answer 1

only debt

Question 2

Corporations issue

Answer 2

debt and/or equity

they are also smaller than the government bond market

Question 3

A bond that promises a single payment at a fixed future date is called

Answer 3

pure discount bond

Question 4

If a payment is 1 year from now, its called

Answer 4

one-year discount bond if 2 then 2 year discount bond and so on

Question 5

Pure discount bonds is also known as

Answer 5

zero coupon bonds to emphasize that the holder receives no cash payments until maturity

zero and sicount mean bonds that pay no coupons

Question 6

Governments use bonds to

Answer 6

manage long- and short-term cahs flow requirements, almost every country will have government bonds

Question 7

pure discount value

Answer 7

pv = F/ (1 +R) *T

Question 8

Made every 6 months until matured are known

Answer 8

coupons of bonds

Question 9

The value of a level coupon bond is

Answer 9

Present value + present value of its repayements

Question 10

Date when issuer, if bind makes payment, is called

Answer 10

maturity date of the bond

Question 11

The payment at maturity is termed

Answer 11

Bonds’ face value or par value

Question 12

consols

Answer 12

not all bonds have a final maturity date, they need to stop paying coupons and have no maturity date, they are also a perpetuity

Question 13

A pure discount bond is a bond that

Answer 13

promises a single payment at a fixed future date.

Question 14

The payment made at maturity of a bond is called

Answer 14

the face value.

the principal.

Question 15

The cash payments that a level coupon bond makes at regular times up to maturity are based on the

Answer 15

coupon rate.

Question 16

The denomination is another word used for the bond’s

Answer 16

It is another word for the face value (or principal) of the bond.

Question 17

A level coupon bond has a face value of F and it makes coupon payments equal to C. Given that the interest rate is R, the bond expires in T periods and the annuity factor is AR/T, what is the correct formula for its valuation?

Answer 17

PV = C x AR/T + F/(1+R)T

Question 18

A bond that promises a single payment at a fixed future date is called

Answer 18

a pure discount bond.

Question 19

Which of the following are correct regarding the coupons of a bond?

Answer 19

They are paid in regular intervals such as six months.

Some bonds do not make coupon payments.

Question 20

The term ‘T’ in the pure discount value formula stands for

Answer 20

the number of years to the maturity of the bond

Question 21

The cash payments that a level coupon bond makes at regular times up to maturity are based on the

Answer 21

coupon rate.

Question 22

The person making the loan is called the

Answer 22

creditor

lender

Question 23

True or false: If the coupon rate is 5% and the yield to maturity is 8% the bond will sell at a premium.

Answer 23

False

Reason: If the yield to maturity is higher than the coupon rate the bond price will be lower than the face value and the bond will sell at discount.

Question 24

When the coupon rate is above the market-wide interest rate the bond sells at

Answer 24

a premium.

Question 25

The value of a level coupon bond is the ______ value of its stream of coupon payment plus the present value of its repayment of principal.

Answer 25

present

Question 26

The bond price is the same as the face value when the coupon rate is ______ the market-wide interest rate.

Answer 26

equal to

Question 27

True or false: A firm can legally default on a debt at any time.

Answer 27

true Reason: A firm can legally default on a debt at any time.

Question 28

The discount rate that makes the price of the bond equal to the discounted value of the coupon payments and face value is called

Answer 28

yield to maturity.

Question 29

The original amount borrowed by a firm is called the

Answer 29

principal

Question 30

In the context of a loan agreement a debtor is _blank_.

Answer 30

the person or firm taking the loan

Question 31

The distinction between debt and equity is important for

Answer 31

tax purposes

Question 32

Which of the following usually refer to an unsecured type of debt?

Answer 32

debenture

Question 33

A bond will be selling at a discount when its market price is ______ its par value.

Answer 33

less than

Question 34

Long-term debt is also known as ______.

Answer 34

funded debt

Question 35

As a general rule, which of the following are true of debt and equity?

Answer 35

Equity represents an ownership interest. The maximum reward for owning debt is fixed.

Question 36

Debt that is due within one year is characterized as a

Answer 36

current liability

Question 37

The periodic interest payments to the bondholders are known as

Answer 37

coupons

Question 38

Subordinated lenders will be paid off ______ compensated.

Answer 38

only after senior creditors have been

Question 39

Debentures and bonds are ______.

Answer 39

long-term debt non-current liabilities

Question 40

Coupons are expressed as a fraction of the

Answer 40

par or face value

Question 41

Which of the following could be restrictive covenants on debt?

Answer 41

Minimum level of working capital Restrictions on further indebtedness

Question 42

Which of the following are usually included in a bond's indenture?

Answer 42

protective covenants The repayment arrangements

Question 43

The written agreement between the corporate debt issuer and the lender is called a(n) ______.

Answer 43

indenture

Question 44

In the event of default, ______ debt must be repaid first.

Answer 44

senior

Question 45

What factors influence the credit rating of a firm?

Answer 45

The protections present in the loan contract The likelihood of default

Question 46

The highest quality bonds are rated

Answer 46

AAA

Question 47

Select the factor that does not influence the credit rating of a firm.

Answer 47

The standard deviation of revenue Reason: Credit ratings depend on the probability of the firm failing and the protection in the event of default, which are determined by the loan conditions.

Question 48

Bonds rated below BBB are commonly known as

Answer 48

junk bonds

Question 49

Investment-grade bonds have a __ yield than junk bonds.

Answer 49

lower Reason: Investment-grade bonds have a lower yield than junk bonds.

Question 50

Compared to investment grade bonds, junk bonds are

Answer 50

more likely to default in an economic downturn. Reason: Junk bonds are more likely to default in an economic downturn, as they are speculative in nature as the firm is higher risk.

Question 51

Bonds rated BBB or above are known as

Answer 51

investment grade bonds

Question 52

During economic downturns, which type of bonds are most likely to default?

Answer 52

High-yield bonds Reason: During economic downturns, high-yield, or junk, bonds are most likely to default because of their speculative nature.

Question 53

True or false: Public debt issues are more expensive than public equity issues.

Answer 53

False Reason: Public equity issues are much more expensive than public debt issues, particularly for investment grade bonds.

Question 54

Why might a firm choose to issue junk bonds?

Answer 54

Because it allows the firm to undertake takeovers Reason: A firm may issue junk bonds as this will allow it to buy other companies, which would not be possible otherwise.

Question 55

Public issues of debt have a ______ cost of issuance compared to public equity issuance.

Answer 55

lower Reason: The costs of issuing debt are significantly lower than the costs of issuing equity.