Chapter 6--Bonds (Debt)--Ch - Copy

Chapter 6--Bonds (Debt)--Ch - Copy - Chapter...

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Chapter 6--Bonds (Debt)--Characteristics and Valuation Chapter 6--Bonds (Debt)-- Characteristics and Valuation Student: ___________________________________________________________________________ 1. Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured. True False 2. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates. True False 3. Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years. True False 4. The motivation for floating rate bonds arose out of the costly experience of the early 1980s when inflation pushed interest rates to very high levels causing sharp declines in the prices of long-term bonds. True False 5. Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare. True False 6. There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse). True False
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7. LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations. True False 8. In general, long-term unsecured debt is less costly than long-term secured for a particular firm. True False 9. Foreign debt is a debt instrument sold by a foreign borrower but denominated in the currency of the country in which it is sold. True False 10. Foreign debt is debt sold in a country other than the one in whose currency the debt is denominated. True False 11. Eurobonds have a higher level of required disclosure than normally is found for bonds issued in domestic markets, particularly the United States. True False 12. Eurobonds are typically issued as registered bonds rather than bearer bonds. True False 13. Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located. True False 14. Although common stock represents a riskier investment to an individual than do bonds, in the sense of exposing the firm to the risk of bankruptcy, bonds represent a riskier method of financing to a corporation than does common stock. True False 15. Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture. True False
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16. One of the disadvantages to a firm in issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.
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