FM14e-TB-CHAPTER 5 BONDS, BOND VALUATION, AND INTEREST RATES
TRUE/FALSE
1. If a firm raises capital by selling new bonds, it is called the "issuing fir
... [Show More] m," and the
coupon rate is generally set equal to the required rate on bonds of equal risk.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Issuing bonds KEY: Bloom’s: Knowledge
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.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Call provision KEY: Bloom’s: Knowledge
3. Sinking funds are devices used to force companies to retire bonds on a scheduled basis
prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund
by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Sinking funds KEY: Bloom’s: Knowledge
4. A zero coupon bond is a bond that pays no interest and is offered (and subsequently
sells initially) at par. These bonds provide compensation to investors in the form of capital
appreciation.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Zero coupon bond KEY: Bloom’s: Knowledge
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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Floating-rate debt KEY: Bloom’s: Knowledge
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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 5-3 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Discounted cash flows KEY: Bloom’s: Knowledge
7. For bonds, price sensitivity to a given change in interest rates is generally greater the
longer before the bond matures [Show Less]