chapter-07-interest-rates-and-bond-valuation-9

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51. Last year, Lexington Homes issued $1 million in
unsecured, non-callable debt. This debt pays an annual interest payment of $55
and matures 6 years from now. The face value is $1,000 and the market price is
$1,020. Which one of these terms correctly describes a feature of this
debt?
A. semi-annual coupon
B. discount bond
C. note
D. trust deed
E. collateralized

52. Callable bonds generally:
A. grant the bondholder the option to call the bond anytime after the
deferment period.
B. are callable at par as soon as the call-protection period ends.
C. are called when market interest rates increase.
D. are called within the first three years after issuance.
E. have a sinking fund provision.

53. Which of the following are negative covenants that
might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.10 or better.
II. No debt senior to this issue can be issued.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.
A. I and II only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, and III only

54. Protective covenants:
A. apply to short-term debt issues but not to long-term debt issues.
B. only apply to privately issued bonds.
C. are a feature found only in government-issued bond indentures.
D. only apply to bonds that have a deferred call provision.
E. are primarily designed to protect bondholders.

55. Which one of the following statements concerning
bond ratings is correct?
A. Investment grade bonds are rated BB or higher by Standard & Poor’s.
B. Bond ratings assess both interest rate risk and default risk.
C. Split rated bonds are called crossover bonds.
D. The highest rating issued by Moody’s is AAA.
E. A “fallen angel” is a term applied to all “junk”
bonds.

56. A “fallen angel” is a bond that has
moved from:
A. being publicly traded to being privately traded.
B. being a long-term obligation to being a short-term obligation.
C. having a yield-to-maturity in excess of the coupon rate to having a yield-to-
maturity that is less than the coupon rate.
D. senior status to junior status for liquidation purposes.
E. investment grade to speculative grade.

57. Bonds issued by the U.S. government:
A. are considered to be free of interest rate risk.
B. generally have higher coupons than those issued by an individual state.
C. are considered to be free of default risk.
D. pay interest that is exempt from federal income taxes.
E. are called “munis”.

58. Treasury bonds are:
A. issued by any governmental agency in the U.S.
B. issued only on the first day of each fiscal year by the U.S. Department
of Treasury.
C. bonds that offer the best tax benefits of any bonds currently
available.
D. generally issued as semi-annual coupon bonds.
E. totally risk-free.

59. Municipal bonds:
A. are totally risk-free.
B. generally have higher coupon rates than corporate bonds.
C. pay interest that is federally tax-free.
D. are rarely callable.
E. are free of default-risk.

60. The break-even tax rate between a taxable corporate
bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5
percent can be expressed as:
A. 0.05/(1 – t*) = 0.07.
B. 0.05 – (1 – t*) = 0.07.
C. 0.07 + (1 – t*) = 0.05.
D. 0.05´ (1 – t*) = 0.07.
E. 0.05´ (1 + t*) = 0.07.

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