Finance Final Exam UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
The cost of long-term debt generally ________ that of short-term debt.
A) is less than
B) is equal to
C) is greater than
D) has no relation to
Chapter 6 - Correct answers✔✔C) is greater than
A ________ is a restrictive provision on a bond which provides for the systematic retirement of
the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause - Correct answers✔✔B) sinking-fund requirement
If a bond pays $1,000 plus interest at maturity, $1,000 is called the
A) stated value.
B) market value.
C) par value.
D) long-term value. - Correct answers✔✔C) par value.
All of the following are examples of restrictive debt covenants EXCEPT
A) prohibition on selling accounts receivable.
,B) supplying the creditor with audited financial statements.
C) constraint on subsequent borrowing.
D) prohibition on entering certain types of lease arrangements. - Correct answers✔✔B)
supplying the creditor with audited financial statements.
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A) call
B) conversion
C) put
D) capitalization - Correct answers✔✔A) call
The less certain a cash flow, the ________ the risk, and the ________ the present value of the
cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher - Correct answers✔✔C) higher; lower
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding.
The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of
similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.
A) $1,000
B) $716.67
C) $840.67
D) $1,123.33 - Correct answers✔✔C) $840.67
, A bond will sell ________ when the stated rate of interest exceeds the required rate of return,
________ when the stated rate of interest is less than the required return, and ________ when the
stated rate of interest is equal to the required return.
A) at a premium; at a discount; equal to the par value
B) at a premium; equal to the par value; at a discount
C) at a discount; at a premium; equal to the par value
D) equal to the par value; at a premium; at a discount - Correct answers✔✔A) at a premium; at a
discount; equal to the par value
Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual
coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this
information, the yield to maturity on the Tangshan Industries bond is
A) 10.79 percent.
B) 11.39 percent.
C) 12.19 percent.
D) 13.29 percent. - Correct answers✔✔A) 10.79 percent.
10) Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-
year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent
coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The
market required return for each bond is 10 percent. When using present value to determine the
prices of the bonds, Danno will find that
A) there is no difference in price.
B) the price of F is greater than H.
C) the price of H is greater than F.
D) he needs more information before determining the prices. - Correct answers✔✔A) there is no
difference in price.
11) Key differences between common stock and bonds include all of the following EXCEPT
QUESTIONS AND CORRECT ANSWERS
The cost of long-term debt generally ________ that of short-term debt.
A) is less than
B) is equal to
C) is greater than
D) has no relation to
Chapter 6 - Correct answers✔✔C) is greater than
A ________ is a restrictive provision on a bond which provides for the systematic retirement of
the bonds prior to their maturity.
A) redemption clause
B) sinking-fund requirement
C) conversion feature
D) subordination clause - Correct answers✔✔B) sinking-fund requirement
If a bond pays $1,000 plus interest at maturity, $1,000 is called the
A) stated value.
B) market value.
C) par value.
D) long-term value. - Correct answers✔✔C) par value.
All of the following are examples of restrictive debt covenants EXCEPT
A) prohibition on selling accounts receivable.
,B) supplying the creditor with audited financial statements.
C) constraint on subsequent borrowing.
D) prohibition on entering certain types of lease arrangements. - Correct answers✔✔B)
supplying the creditor with audited financial statements.
The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A) call
B) conversion
C) put
D) capitalization - Correct answers✔✔A) call
The less certain a cash flow, the ________ the risk, and the ________ the present value of the
cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher - Correct answers✔✔C) higher; lower
A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding.
The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of
similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.
A) $1,000
B) $716.67
C) $840.67
D) $1,123.33 - Correct answers✔✔C) $840.67
, A bond will sell ________ when the stated rate of interest exceeds the required rate of return,
________ when the stated rate of interest is less than the required return, and ________ when the
stated rate of interest is equal to the required return.
A) at a premium; at a discount; equal to the par value
B) at a premium; equal to the par value; at a discount
C) at a discount; at a premium; equal to the par value
D) equal to the par value; at a premium; at a discount - Correct answers✔✔A) at a premium; at a
discount; equal to the par value
Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual
coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this
information, the yield to maturity on the Tangshan Industries bond is
A) 10.79 percent.
B) 11.39 percent.
C) 12.19 percent.
D) 13.29 percent. - Correct answers✔✔A) 10.79 percent.
10) Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-
year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent
coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The
market required return for each bond is 10 percent. When using present value to determine the
prices of the bonds, Danno will find that
A) there is no difference in price.
B) the price of F is greater than H.
C) the price of H is greater than F.
D) he needs more information before determining the prices. - Correct answers✔✔A) there is no
difference in price.
11) Key differences between common stock and bonds include all of the following EXCEPT
