FIN EXAM 2.1 - FIN 221 Spring 2009 Exam 2 Multiple Choice Identify the choice that best completes the statement or answers the question 1 KJM

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FIN 221 Spring 2009 Exam 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. KJM Corporation's balance sheet as of January 1, 2006 is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 These semiannual coupon bonds have a 4% annual coupon rate and a par value of $1,000. They mature on January 1, 2016. If the yield to maturity is 12% APR, what is the current market value of the firm's debt? A. $7,706,000 B. $2,531,000 C. $5,412,000 D. $5,480,000 E. $7,056,000 2. A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? A. The bond is currently selling at a price below its par value. B. If market interest rates decline, the price of the bond will also decline. C. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. D. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. E. The bond should currently be selling at its par value. 3. Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and an annual coupon rate of 10%. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20%, what should the bonds sell for in the market today? A. $281.69 B. $242.26 C. $362.44 D. $578.31 E. $813.69 4. Which of the following statements is CORRECT? A. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
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B. The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant over time. C. The total return on a bond for a given year consists only of the coupon interest payments received. D. When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. E. For a given firm, its debentures are likely to have a lower yield to maturity relative to its mortgage bonds. 5. Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond 7.72% A 9.64% AAA 8.72% BBB 10.18% The differences in rates among these issues were caused primarily by A. Inflation differences. B.
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This note was uploaded on 05/05/2010 for the course ECONMOICS ECON 203 taught by Professor Josephpetry during the Spring '10 term at University of Illinois, Urbana Champaign.

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FIN EXAM 2.1 - FIN 221 Spring 2009 Exam 2 Multiple Choice Identify the choice that best completes the statement or answers the question 1 KJM

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