Consider the following four debt securities, which are identical in every characteristic except as noted: (W) A corporate bond rated AAA (X) A corporate bond rate BBB (Y) A corporate bond rated AAA with a shorter time to maturity than bonds W and X. (Z) A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y. Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest? X, W, Y, Z W, X, Z, Y X, Y, Z, W X, Z, W, Y
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- Which of the following is correct? A. Bonds maturing at a specified single date are called ordinary bonds. B. Equity securities and debt securities differ only in their effect on a company’s cash flow. C. One purpose in holding bonds as a long-term investment is to provide the investor a voting voice in the management of the issuing company. C. On bonds, the yield rate and the nominal rate of interest are always different.Martin Bowman is preparing a report distinguishing traditional debt securities from structured note securities. Discuss how the following structured note securities differ from a traditional debt security with respect to coupon and principal payments:a. Equity index-linked notes.b. Commodity-linked bear bond.describe and contrast the characteristics and attributes of each of the following bond types: corporate bonds convertible corporate bonds debenture bonds mortage backed bonds zero coupon bonds us treasury bonds agency bonds minicipal bonds
- You review the characteristics of a recent corporate bond issue and notice that the issuing firm's Debt to Equity (D/E) ratio is higher than the industry average, while its Return on Equity (ROE) is lower than the industry average. If bonds issued by other firms with industry average D/E and ROE ratios have a BBB rating, you can draw the following conclusion: a. This bond is likely to have a higher rating (A or above). b. This bond is likely to have a lower rating (BB or below). c. This bond will also have a BBB rating.Listed below are terms and definitions associated with bonds. Match (by letter) the bond terms with their definitions. Each letter is used only once. Terms_____ 1. Sinking fund._____ 2. Secured bond._____ 3. Unsecured bond._____ 4. Term bond._____ 5. Serial bond._____ 6. Callable bond._____ 7. Convertible bond._____ 8. Bond issue costs.Definitionsa. Allows the issuer to pay off the bonds early at a fixed price.b. Matures in installments.c. Secured only by the “full faith and credit” of the issuing corporation.d. Allows the investor to transfer each bond into shares of common stock.e. Money set aside to pay debts as they come due.f. Matures on a single date.g. Supported by specific assets pledged as collateral by the issuer.h. Includes underwriting, legal, accounting, registration, and printing fees.Rating agencies—such as Standard & Poor’s (S&P) and Moody’s Investor Service—assign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer’s default risk, which impacts the bond’s interest rate and the issuer’s cost of debt capital.Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following bonds is likely to be classified as an investment-grade bond?A bond with 30% return on capital, total debt to total capital of 15%, and 6% yieldA bond with 10% return on capital, total debt to total capital of 85%, and 13% yieldYou heard that rating agencies have upgraded a bond’s rating. The yield on the bond is likely to , and the bond’s price will .Assume you make the following investments:• A $10,000 investment in a 10-year T-bond that has a yield of 5.00%• A $20,000 investment in a 10-year corporate bond with an AA rating and a yield of 6.50%Based…
- Which of the following fixed income securities has the highest level of risk? Which one has the highest level of liquidity? a. treasury bonds b. agency bonds c. corporate bonds d. municipal bondsBased on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield, noncallable bonds or callable bonds? Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment risk than long-term securities.You can distinguish the various types of bonds by their terms of contract, pledge of collateral, and so on. Identify the type of bond based on each description given in the table that follows: Description Type of Bond These bonds are collateralized securities with first claims in the event of bankruptcy. These bonds are not backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times. During a period of economic growth and in an optimistic environment, the yield spread between US government…
- Which of the following statements is CORRECT? Group of answer choices The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company’s own long-term bonds. The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal or is available online. The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used. An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity. The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure. Beta measures market risk,…All else held constant, which one of the following bonds is likely to have the highest required rate of return? a. AAA-rated noncallable corporate bond with a sinking fund b. AA-rated callable corporate bond with a sinking fund c. AAA-rated callable corporate bond with a sinking fund d. High-quality municipal bond e. AA-rated callable corporate bond without a sinking fund Clear my choiceWhich of the following statements is true? a A bond with a sinking fund will have the higher required yield than a bond without a sinking fund, all else equal. b Callable bonds will have a higher price than non-callable bonds, all else equal. c Floating rate bonds are bonds with floating par values tied to the stock price. d Senior bonds will have a higher price than subordinated bonds, all else equal. e Secured bonds will have a higher required yield than debenture bonds, all else equal Which of the following statements is true? a The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to minimize the chances of losses and avoid financial distress. b Shareholders who have rights can never hold the same ownership position again even after exercising their rights. c A new public equity issue from a company with equity previously outstanding is called a seasoned equity…