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Hello there, I need some help for these very easy FIN 361 (Financial Management) questions.

Hello there, I need some help for these very easy FIN 361 (Financial Management) questions.

Daniel Kevins

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Part 1

Bonds are _____.

Check all that apply:

issued by governments or corporations

loans from investors to issuers

less costly than bank loans for the borrower

riskier than stocks

Part 1

Which term has a meaning different from the other ones?

Price

Amount to be repaid on the maturity date

Par value

Face value

Part 1

If the state of California issues a bond, it is called a _____.

corporate bond

state bond

municipal bond

Treasury bond

Part 2

Municipal bonds are bonds issued by _____.

the federal government

corporations

non-profit organizations

state and local governments

Part 1

Which are elements of the indenture?

Check all that apply:

Price of the bond

Description of collateral

Description of protective covenants

Repayment arrangements

Basic terms of the bonds, such as coupon rate and maturity date5

Part 1

Why would an investor buy an unsecured corporate bond instead of a comparable secured corporate bond?

The unsecured bond has a higher face value.

The unsecured bond has higher priority in the case of bankruptcy.

The unsecured bond offers a higher yield to maturity.

The unsecured bond is more liquid and thus easier to sell

Part 2

Why do bonds with lower seniority have higher yields to maturity than comparable bonds with higher seniority?

To compensate investors for greater default risk.

To compensate investors for lower liqudity.

To compensate investors for less time to maturity.

To compensate investors for lower coupons.

Part 1

A callable bond is a bond that _____.

can be sold back to the issuer before the maturity date

can be sold back to the issuer on the maturity date

can be repurchased by the issuer on the maturity date

can be repurchased by the issuer before the maturity date

Intro

You currently don’t have a car, but rent a car that’s parked just outside your house whenever you need one. Your annual expenditure on rental cars is $2,500.

You’ve now considering purchasing a car that would give you the same level of convenience as your current life style. The car costs $24,000 and can be sold for $5,000 after 10 years. You’d purchase the car with money from your savings account which always earns an interest rate of 6%.

Assume that all cash flows occur at the end of each year (maybe because you drive much more around Thanksgiving and Christmas).

Part 1

What is the present value of the benefits of owning that car, i.e., saving on rental expenses and selling the car?

Part 2

Should you buy the car?

Yes

8)

Intro

Consider a typical U.S. corporate bond.

Part 1

What is the par or face value?

Part 2

How many times per year does it pay interest?

Part 3

How is the coupon rate and yield to maturity expressed?

As a 6-month period rate

As an effective annual rate (EAR)

As an annual percentage rate (APR) with semiannual compounding

As an annual percentage rate (APR) with annual compounding

9)

Intro

Treasury spot interest rates are as follows:

Maturity (years)	1	2	3	4
Spot rate (EAR)	1.4%	2.8%	3%	4.5%

Part 1

What is the price of a risk-free zero-coupon bond with 3 years to maturity and a face value of $1,000 (in $)?

10)

Intro

One of IBM’s bond issues has an annual coupon rate of 4.3%, a face value of $1,000 and matures in 13 years.

Part 1

What is the value of the bond if the required return is 5%?

Part 2

What is the value of the bond if the required return is 6%?

11)

Intro

A corporate bond has 17 years to maturity, a face value of $1,000, a coupon rate of 4.6% and pays interest twice a year. The annual market interest rate for similar bonds is 3.1%.