FFM12, Ch 07, TB, 01-28-09 - CHAPTER 7 BONDS AND THEIR...

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Chapter 7: Bonds True/False Page 237 (Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines. Multiple Choice: True/False (7-2) Issuing bonds F G Answer: a EASY 1. If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk. a. True b. False (7-2) Call provision F G Answer: b EASY 2. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline. a. True b. False (7-2) Sinking fund F G Answer: a EASY 3. Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond's face value. a. True b. False (7-2) Zero coupon bond F G Answer: b EASY 4. A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation. a. True b. False CHAPTER 7 BONDS AND THEIR VALUATION
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Page 238 True/False Chapter 7: Bonds (7-2) Floating-rate debt F G Answer: a EASY 5. The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds. a. True b. False (7-3) Discounted cash flows F G Answer: a EASY 6. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present. a. True b. False (7-5) Bond prices and int. rates F G Answer: a EASY 7. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity. a. True b. False (7-7) Interest rate risk F G Answer: b EASY 8. A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.) a. True b. False (7-7) Interest rate risk F G Answer: b EASY 9. Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond. a. True
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FFM12, Ch 07, TB, 01-28-09 - CHAPTER 7 BONDS AND THEIR...

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