fina 5320 EXAM QUESTIONS AND VERIFIED
ACCURATE SOLUTION |GET IT 100% ACCURATE!!!
Standard provisions include such requirements as - ANSWER-providing audited financial statements on a
regular schedule, paying taxes and liabilities when due, maintaining all facilities in good working order,
and keeping accounting records in accordance with generally accepted accounting procedures (GAAP).
Protective covenants - ANSWER-indenture conditions that limit the actions of firms
Negative covenant - ANSWER-"thou shalt not" sell major assets, etc.
Positive covenant - ANSWER-"thou shalt" keep working capital at or above $X, etc.
government bonds - ANSWER-Long-term debt instruments issued by a governmental entity.
zero coupon bonds - ANSWER-are bonds that are offered at deep discounts because there are no
periodic coupon payments
Floating-rate bonds - ANSWER-coupon payments adjust periodically according to an index. Also,
-put provision - holder can sell back to issuer at par
-collar - coupon rate has a floor and a ceiling
income bonds - ANSWER-coupon is paid if income is sufficient
Convertible bonds - ANSWER-can be traded for a fixed number of shares of stock
put bonds - ANSWER-shareholders can redeem for par at their discretion
Determinants of Interest Rates for Individual Securities - ANSWER-a. Inflation
b. Real Interest Rates
,what is inflation - ANSWER-is the rate of change in the overall price level
The Consumer Price Index (CPI) is - ANSWER-the most commonly quoted measure of inflation. The CPI
purports to measure the price level of a market basket of goods and services purchased by the typical
urban consumer
Nominal rates - ANSWER-rates that have not been adjusted for inflation
Real rates - ANSWER-rates that have been adjusted for inflation
The Fisher effect states - ANSWER-that nominal rates equal real rates plus a premium for expected
inflation. This relationship is the basis for the term structure. Differences in annual expected inflation
rates cause differences in bond rates with different maturities.
The nominal interest rate is the additional - ANSWER-dollars earned from an investment
The real interest rate is the additional - ANSWER-purchasing power earned from an investment.
The real interest rate refers to the - ANSWER-marginal gain in units purchased rather than in dollars.
Default risk premiums (DRPs) are - ANSWER-increases in required yield needed to offset the possibility
the borrower will not repay the promised interest and principle in full or as scheduled.
Liquidity risk premiums are - ANSWER-are increases in required or promised yields designed to offset
the risk of not being able to sell the asset in timely fashion at fair value.
Municipal bond (Muni) rates are - ANSWER-· lower than similar corporate bonds because interest (but
not capital gains) is exempt from federal taxation. In most states the holder of a muni bond issued in
that state is also exempt from state taxes.
, Callable bonds have - ANSWER-· higher required yields than straight bonds because the issuer will
normally call them when rates have dropped, forcing the bondholders to reinvest at lower interest
rates. Although it varies with interest rate expectations the premium on a callable bond might be 30 to
50 basis points.
Convertible bonds have - ANSWER-· have lower yields than straight bonds because the bondholder has
the right to convert them to preferred or common stock at their choice. Offering a conversion feature
may save 100 to 200 basis points, ceteris paribus. In most cases however, the stock has to appreciate
15%-25% over the at issue price in order to make conversion attractive.
The term structure depicts - ANSWER-depicts the relationship between maturity and yields for bonds
identical in all respects except maturity.
In practice, 'identical' means - ANSWER-same rating, liquidity and hopefully the same coupon (or
differential tax effects will be present).
Term structure of interest rates - ANSWER-the relationship between nominal interest rates on default-
free, pure discount securities and time to maturity
Inflation premium - ANSWER-portion of the nominal rate that is compensation for expected inflation
Interest rate risk premium - ANSWER-compensation for bearing interest rate risk
Short-term borrowing - ANSWER-is normally less expensive than long-term borrowing due to the greater
uncertainty associated with longer maturity loans. The major factors affecting the cost of long-term debt
(or the interest rate), in addition to loan maturity, are loan size, borrower risk, and the basic cost of
money.
conversion feature - ANSWER-the bondholders have the option of converting the bond into a certain
number of shares of stock within a certain period of time.
A call feature - ANSWER-feature gives the issuer the opportunity to repurchase, or call, bonds at a stated
price prior to maturity.
ACCURATE SOLUTION |GET IT 100% ACCURATE!!!
Standard provisions include such requirements as - ANSWER-providing audited financial statements on a
regular schedule, paying taxes and liabilities when due, maintaining all facilities in good working order,
and keeping accounting records in accordance with generally accepted accounting procedures (GAAP).
Protective covenants - ANSWER-indenture conditions that limit the actions of firms
Negative covenant - ANSWER-"thou shalt not" sell major assets, etc.
Positive covenant - ANSWER-"thou shalt" keep working capital at or above $X, etc.
government bonds - ANSWER-Long-term debt instruments issued by a governmental entity.
zero coupon bonds - ANSWER-are bonds that are offered at deep discounts because there are no
periodic coupon payments
Floating-rate bonds - ANSWER-coupon payments adjust periodically according to an index. Also,
-put provision - holder can sell back to issuer at par
-collar - coupon rate has a floor and a ceiling
income bonds - ANSWER-coupon is paid if income is sufficient
Convertible bonds - ANSWER-can be traded for a fixed number of shares of stock
put bonds - ANSWER-shareholders can redeem for par at their discretion
Determinants of Interest Rates for Individual Securities - ANSWER-a. Inflation
b. Real Interest Rates
,what is inflation - ANSWER-is the rate of change in the overall price level
The Consumer Price Index (CPI) is - ANSWER-the most commonly quoted measure of inflation. The CPI
purports to measure the price level of a market basket of goods and services purchased by the typical
urban consumer
Nominal rates - ANSWER-rates that have not been adjusted for inflation
Real rates - ANSWER-rates that have been adjusted for inflation
The Fisher effect states - ANSWER-that nominal rates equal real rates plus a premium for expected
inflation. This relationship is the basis for the term structure. Differences in annual expected inflation
rates cause differences in bond rates with different maturities.
The nominal interest rate is the additional - ANSWER-dollars earned from an investment
The real interest rate is the additional - ANSWER-purchasing power earned from an investment.
The real interest rate refers to the - ANSWER-marginal gain in units purchased rather than in dollars.
Default risk premiums (DRPs) are - ANSWER-increases in required yield needed to offset the possibility
the borrower will not repay the promised interest and principle in full or as scheduled.
Liquidity risk premiums are - ANSWER-are increases in required or promised yields designed to offset
the risk of not being able to sell the asset in timely fashion at fair value.
Municipal bond (Muni) rates are - ANSWER-· lower than similar corporate bonds because interest (but
not capital gains) is exempt from federal taxation. In most states the holder of a muni bond issued in
that state is also exempt from state taxes.
, Callable bonds have - ANSWER-· higher required yields than straight bonds because the issuer will
normally call them when rates have dropped, forcing the bondholders to reinvest at lower interest
rates. Although it varies with interest rate expectations the premium on a callable bond might be 30 to
50 basis points.
Convertible bonds have - ANSWER-· have lower yields than straight bonds because the bondholder has
the right to convert them to preferred or common stock at their choice. Offering a conversion feature
may save 100 to 200 basis points, ceteris paribus. In most cases however, the stock has to appreciate
15%-25% over the at issue price in order to make conversion attractive.
The term structure depicts - ANSWER-depicts the relationship between maturity and yields for bonds
identical in all respects except maturity.
In practice, 'identical' means - ANSWER-same rating, liquidity and hopefully the same coupon (or
differential tax effects will be present).
Term structure of interest rates - ANSWER-the relationship between nominal interest rates on default-
free, pure discount securities and time to maturity
Inflation premium - ANSWER-portion of the nominal rate that is compensation for expected inflation
Interest rate risk premium - ANSWER-compensation for bearing interest rate risk
Short-term borrowing - ANSWER-is normally less expensive than long-term borrowing due to the greater
uncertainty associated with longer maturity loans. The major factors affecting the cost of long-term debt
(or the interest rate), in addition to loan maturity, are loan size, borrower risk, and the basic cost of
money.
conversion feature - ANSWER-the bondholders have the option of converting the bond into a certain
number of shares of stock within a certain period of time.
A call feature - ANSWER-feature gives the issuer the opportunity to repurchase, or call, bonds at a stated
price prior to maturity.
