Chapter 7

Question 1

A long-term promissory note issued by the borrower, promising to pay the owner of the security a predetermined, fixed amount of interest each year

Answer 1

Bond

Question 2

Any unsecured long-term debt

Answer 2

Debenture

Question 3

A bond secured by a lien on real property

Answer 3

Mortgage Bond

Question 4

A bond issued in a country different from the one in which the currency of the bond is denominated

Answer 4

Eurobond

Question 5

A debt security that can be converted into a firm’s stock at a prespecified price

Answer 5

Convertible Bond

Question 6

On the face of a bond, the stated amount that the firm is to repay upon the maturity date

Answer 6

Par Value

Question 7

The interest rate contractually owed on a bond as a percent of its par value

Answer 7

Coupon Interest Rate

Question 8

A bond that pays a fixed amount of interest to the investor each year

Answer 8

Faxed-rate Bond

Question 9

A bond issued at a substantial discount from its $1,000 face value and that pays little or no interest

Answer 9

Zero Coupon Bond

Question 10

The length of time until the bond issuer returns the par value to the bondholder and terminates the bond

Answer 10

Maturity

Question 11

An option available to a company issuing a bond whereby the issuer can redeem the bond before it is due. Done if interest rates decline below what the firm is paying on the bond

Answer 11

Callable Bond

Question 12

A prespecified time period during which a company cannot recall a bond

Answer 12

Call Protection Period

Question 13

The legal agreement between the firm issuing the bonds and the bond trustee who represents the bondholders, providing the specific terms of the loan

Answer 13

Indenture

Question 14

Any bond rated BB or below

Answer 14

Junk Bond

Question 15

The value of an asset as shown on the firm’s balance sheet

Answer 15

Book Value

Question 16

The dollar sum that could be realized if an asset were sold

Answer 16

Liquidation Value

Question 17

The present value of an asset’s expected future cash flows. This value is the amount the investor considers to be fair value, given the amount, timing, and riskiness of future cash flows

Answer 17

Intrinsic Value

Question 18

The present value of an asset’s expected future cash flows

Answer 18

Fair Value

Question 19

Market where the values of all securities fully recognize all available public information

Answer 19

Efficient Market

Question 20

The field of study examining when investors act rationally or irrationally when making investment decisions

Answer 20

Behavioral Finance

Question 21

The discount rate that equates the present value of future cash flows of a bond with its current market price

Answer 21

Expected Rate of Return

Question 22

The rate of return a bondholder will receive if the bond is held to maturity

Answer 22

Yield to Maturity

Question 23

The ratio of bond’s annual interest payment to its market price

Answer 23

Current Yield

Question 24

The variability in a bond’s value caused by changing interest rates

Answer 24

Interest Rate Risk

Question 25

A bond that sells at a discount, or below par value

Answer 25

Discount Bond

Question 26

A bond that is selling above its par value

Answer 26

Premium Bond