Bond Valuation Flashcards
Which of the following is an unsecured loan?
A. A furniture loan
B. A credit card
C. A car title loan
D. A mortgage
B. A credit card
Suppose that John has a 30 year mortgage on his house. If he fails to make the monthly mortgage payments on time for a while, the lender will take the house away from him to sell it to pay off the remaining balance of the mortgage. Which type of loan does this represent?
A. Mortgage backed security
B. Bond
C. Unsecured loan
D. Secured loan
D. Secured loan
Suppose that Jane has not been able to make any payments on her credit card debts. The credit card companies sued her to collect her debts. Why can’t the credit card companies take away her house or her car to pay her debts?
A. Because credit cards are unsecured loans that have no collateral
B. Because credit cards are unsecured loans that are tied to her income
C. Because credit cards are secured loans
D. Because credit cards are secured loans that but tied to her income
A. Because credit cards are unsecured loans that have no collateral
Why are bonds primary method for raising capital?
A. They repeat the principle slowly over the life of the loan.
B. They avoid even costs of The intermediary
C. Coupon payments may be skipped in times of financial distress.
D. Coupon payments are flexible from year to year
B. They avoid the costs of the intermediary
Bonds are sold to investors directly and avoid fees paid to intermediary, which is why bonds are the primary method for raising capital. Coupon payments on bonds are fixed. The principal for a bond is paid back at the end of the term. Coupon payments cannot be skipped, or firms will default.
Which type of bond is most likely to be a secured bond?
A. Muni-bond
B. Mortgage bond
C. Debentures
D. Subordinate debenture
B. Mortgage bond
What type of bond is the lowest priority for repayment in the event of liquidation of a firm?
A. Debenture
B. Subordinated debenture
C. Mortgage bond
D. Foreign bond
B. Subordinates debenture
Which type of bond is tax exempt?
A. Convertible bond
B. Foreign bond
C. Muni-bond
D. Treasury bond
C. Municipal bond
Which type of bond is issued in a currency not native to the country in which it is issued?
A. Foreign bond
B. Debenture
C. Eurobond
D. Muni-bond
C. Eurobond
At what level are bonds considered to be investment grade?
Bonds with the rating of BB or below are known as junk bonds. They are considered too risky to be considered investment grade. An investment grade bond is rated BBB and above is considered to be fairly low risk.
A mod is considering a corporate bond that has a rating of a. Which label describes this bond?
A. Junk bond.
B. High yield bond.
C. Investment grade bond.
D. Specular bond.
C. Investment grade bond.
A bond rating of a indicates an investment grade bond. A junk bond, high yield bond, or specular bond has a bond rating of BB or below.
Upon with which of the following ratings is considered high-yield debt?
A. BB.
B. A.
C. AA.
D. BBB.
D. BBB.
A debt has a rating of B or below. Ratings of AA, a, or BBB are given to investment grade bonds.
What advantages does a company gain from high credit worthiness?
A. The company can offer low interest rates on its bonds.
B. The company gets to offer higher interest rate rates to bondholders.
C. The company has limited market penetration.
D. The company receives a junk bond rating.
A. The company can offer low interest rates on its bonds.
A company with high credit worthiness can offer low interest rates on its bonds because it has a very low risk of default, that’s attracting investors at a lower cost
What factor is considered by analyst when determining the risk of bond default?
A. The company’s geographic location.
B. The company stock price volatility.
C. The company’s marketing strategies.
D. The companies debt and liquidity ratios.
D. The company’s debt and liquidity ratios.
Analyst at credit rating agencies, evaluate various debt, ratios, and liquid liquidity ratios to judge the probability of a firm defaulting on its bond obligations
What is the stated interest rate on a bond?
A. Maturity rate.
B. Par value
C. Coupon rate
D. Yield to maturity.
C. Coupon rate.
What are affirmative covenants?
A. Obligations a firm agrees to do.
B. Requirements of divorced by regulating agencies.
C. Requirements to pay a certain percentage of the total value each year.
D. Obligations a firm agrees not to do.
A. Obligations a firm agrees to do.
Affirmative covenant described things the company pledges itself to do. Examples include paying taxes on time, maintaining a certain level of working, and maintaining a minimum debt ratio.
What is the rate of return investors receive on a bond?
A. Coupon rate.
B. Face value.
C. Yield to maturity.
D. Par value.
A. Coupon rate.
Power value is the sum of money that the corporate promises to pay at the bonds expiration. Coupon rate is the interest rate of the bond based on the face value of the bond. Face value is the sum of money that the corporation promises to pay at the bonds expiration
What is the amount repaid at the expiration date?
A. Par value.
B. Maturity rate.
C. Expiration rate.
D. Yield to maturity.
A par value
Par value as a sum of money that the corporation promises to pay at the bonds expiration. The yield to maturity of a bond is the rate of return of the bond that investors receive. The terms, maturity rate and expiration rate are not used for bonds.
What is a bond?
A. An equity instrument issued by a firm that represents a sheriff of ownership in the firm.
B. An asset that a firm provide provides collateral to secure a loan from a financial institution.
C. A debt agreement in which an investor lend a sum of money to a corporation today in return for regular interest, payments and repayment of the original sum at a future date.
D. A debt agreement in which an investor lends sum of money to a corporation today in return for repayment of the time adjusted value of the original sum at a future date.
D. A debt agreement in which an investor lends a sum of money to a corporation today in return for repayment of the time adjusted value of the original sum at a future date.
Bonds are investment vehicles that are used by the government and the companies to raise capital. The other options, describe common stock, indentured bonds, and collateral.
What is the typical cash flow pattern for bonds?
A. A stream of regular payments of principal plus interest.
B. A stream of interest payments and a final payment of interest plus a repayment of principal.
C. A ream of interest payments forever.
D. A stream of regular payments, alternating between principal repayment and interest repayment.
B. A stream of interest payment and a final payment of interest plus a repayment of principal.
I keep on bond has a stream of keep on payments and a principal payment at the end of the life of the bond.
The principle of a bond won’t be paid back as an annuity over the life of the bond. The interest payment of typical bonds do not continue forever. The principle of a bond won’t be paid back until the bond has matured.
What is the most common frequency of payments for corporate bonds?
A. Semi annual.
B. Annual.
C. Monthly.
D. Biannual.
A. Semi annual.
How often are interest payments most commonly made on corporate bonds?
A. biannual
B. Monthly.
C. Quarterly.
D. Semi annually.
D. Semi annually
At the end of a bonds life, what occurs in addition to the final interest payment?
A. Additional purchase of equity.
B. Repayment of the entire principal amount.
C. Conversion into shares of stock.
D. A reset of the bonds terms.
B. Repayment of the entire principal amount.
A company has a bond that matures in 15 years and has a $1000 face value. The coupon rate is 9% and the investors required return rate is 11%. Which excel function is used to find the price of this bond?
A. Pmt
B. PV
C. Rate
D. Fv
B. PV
Since the question is asking to find the price of a bond, the PV function is used.
The FV function is not used to find the price of a bond – FB is always an input for the par value of a bond. The rate function returns the rate of return of a bond. The PMT function is not used for bond evaluation rather the PMT input is used to account for coupon payments
A company has a bond that matures in 15 years and has a $1000 face value. The coupon rate is 9% and the investors required return rate is 11%. The coupon is paid semi annually. What value should be input for the rate variable in the PV function in Excel to find the price of this bond?
A. 0.055
B. 0.11
C. 0.045
D. 0.09
A. 0.055
The rate input is the yield to maturity adjusted to the frequency of keep payments per year. The YTM is 11%, and the coupon is paid semi annually so the rate is 0.055.
