CFIN Final Study Guide || with A+ Guaranteed Solutions.

The higher the expected rate of inflation, _. correct answers The higher is the required rate of return on investment A corporate bond that yields 12% includes a risk-free rate of 7% and a default premium of 3%. The Bond's maturity risk premium is _. correct answers 2% Which bond has the highest default risk for a given return? _. correct answers A CCC Corporate bond with a 10-year maturity Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _ the YTM with the call provision. correct answers lower than A bond that only pays interest if the firm has sufficient earnings to cover the interest payments is called a(n): _. correct answers income bond Which event would make it less likely for a company to choose to call its outstanding callable bonds? correct answers an increase in interest rates Which statement is true about a zero coupon bond? correct answers a zero coupon bond is issued at a substantial discount below its par value Which type of investor would be most likely to purchase zero coupon bonds? _. correct answers tax free investors such as pension funds The face value of a debt is _. correct answers the principal value written on the face, or outside cover of the bond A debt is said to be selling at par, when the _ of the debt is equal to the _. correct answers Maturity value, par value of the debt Commercial paper is a type of _. correct answers Promissory note If interest rates decline, bondholders will earn _. correct answers a lower rate of return on reinvested cash flows The current market interest rate declines from 10% to 8%. Due to interest rate reinvestment risk, the bondholders will _. correct answers earn a lower return on the reinvested cash flows All else being equal, an increase in the yield to maturity of a bond will result in _. correct answers a greater interest rate price risk on a long-term bond than on a short term bond. The amount in excess of par value that a company must pay when it repurchases a security is known as the _. correct answers call premium