A) Equity securities
B) Debt securities
C) Stock options
D) Mutual funds
Answer: B) Debt securities
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2. What is a bond typically considered?
A) A principal-only loan
B) A loan that pays both interest and principal every period
C) An interest-only loan
D) A stock option
Answer: C) An interest-only loan
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3. In the example, if Beck Corporation borrows $1,000 at 12 percent for 30 years, how much will they pay in interest each year?
A) $1,000
B) $120
C) $1,200
D) $12
Answer: B) $120
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4. What term is used for the regular interest payments that a bond promises to pay?
A) Face value
B) Coupon
C) Par value
D) Maturity
Answer: B) Coupon
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5. What type of bond is described when the coupon payments are constant and paid every year?
A) Zero-coupon bond
B) Convertible bond
C) Level coupon bond
D) Discount bond
Answer: C) Level coupon bond
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6. The amount that will be repaid at the end of the loan is known as the bond's ______.
A) Coupon
B) Market value
C) Face value
D) Discount rate
Answer: C) Face value
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7. What is the usual face value of a corporate bond as mentioned in the text?
A) $500
B) $1,000
C) $10,000
D) $100
Answer: B) $1,000
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8. If a bond sells for its face value, what is it called?
A) Discount bond
B) Premium bond
C) Par value bond
D) Floating rate bond
Answer: C) Par value bond
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9. How is the coupon rate of a bond calculated?
A) Annual coupon divided by the bond's market value
B) Face value divided by the annual coupon
C) Annual coupon divided by the bond's face value
D) Coupon payments divided by time to maturity
Answer: C) Annual coupon divided by the bond's face value
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10. What is the term for the number of years until the bond’s face value is paid off?
A) Coupon rate
B) Time to maturity
C) Par value
D) Yield
Answer: B) Time to maturity
What happens to the value of a bond when interest rates rise?
A) The bond's value increases.
B) The bond's value remains unchanged.
C) The bond's value declines.
D) The bond's coupon rate changes.
Answer: C) The bond's value declines
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2. What is the interest rate required in the market on a bond called?
A) Coupon rate
B) Par value
C) Yield to maturity (YTM)
D) Time to maturity
Answer: C) Yield to maturity (YTM)
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3. If a bond's coupon rate is lower than the current market interest rate, the bond will likely sell at a ______.
A) Premium
B) Discount
C) Par value
D) Higher interest rate
Answer: B) Discount
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4. In the example, if Xanth Co. issued a bond with a 10-year maturity and an annual coupon of $80, what is the face value of the bond?
A) $500
B) $1,000
C) $1,500
D) $800
Answer: B) $1,000
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5. How is the total value of a bond calculated?
A) By adding the face value and the annual interest payments
B) By subtracting the yield from the coupon payments
C) By adding the present value of the coupons and the present value of the face amount
D) By multiplying the coupon by the face value
Answer: C) By adding the present value of the coupons and the present value of the face amount
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6. What is the term for a bond that sells for more than its face value?
A) Par bond
B) Discount bond
C) Premium bond
D) Zero-coupon bond
Answer: C) Premium bond
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7. Why does the Xanth bond sell for $115 less than its face value when market interest rates are 10 percent?
A) Because the bond has a coupon rate lower than the market rate
B) Because the bond's maturity date is extended
C) Because the bond is a premium bond
D) Because the bond has an incorrect face value
Answer: A) Because the bond has a coupon rate lower than the market rate
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8. How is the bond's price adjusted to reflect a lower-than-market coupon rate?
A) The face value is increased.
B) The bond is discounted to offer a built-in gain to the buyer.
C) The coupon payments are reduced.
D) The time to maturity is shortened.
Answer: B) The bond is discounted to offer a built-in gain to the buyer.
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9. If interest rates drop by 2 percent, how would this affect the value of the Xanth bond?
A) The bond's value would remain unchanged.
B) The bond would sell for less than $1,000.
C) The bond would sell for more than $1,000.
D) The bond would lose its coupon payments.
Answer: C) The bond would sell for more than $1,000.
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10. How is the annuity present value of $20 per year for nine years at 6 percent calculated?
A) $20 × 5.7590
B) $20 × 6.8017
C) $80 × 6.8017
D) $80 × 5.7590
Answer: B) $20 × 6.8017
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1. What is the risk arising from fluctuating interest rates for bond owners called?
A) Credit risk
B) Default risk
C) Inflation risk
D) Interest rate risk
Answer: D) Interest rate risk
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2. Which of the following bonds is more sensitive to interest rate changes?
A) A bond with a short time to maturity
B) A bond with a high coupon rate
C) A bond with a low coupon rate
D) A zero-coupon bond with 1-year maturity
Answer: C) A bond with a low coupon rate
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3. All other things being equal, which bond has the greatest interest rate risk?
A) A 5-year bond with a 10% coupon rate
B) A 10-year bond with a 5% coupon rate
C) A 1-year bond with a 10% coupon rate
D) A 30-year bond with a 3% coupon rate
Answer: D) A 30-year bond with a 3% coupon rate
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4. Why do longer-term bonds tend to have greater interest rate risk?
A) The present value of future cash flows is more volatile.
B) Short-term bonds offer higher coupon payments.
C) Interest rates are unpredictable over the short term.
D) Longer-term bonds have higher face values.
Answer: A) The present value of future cash flows is more volatile.
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5. What happens to the interest rate risk as the bond’s maturity increases?
A) It increases at an increasing rate.
B) It decreases at an increasing rate.
C) It increases at a decreasing rate.
D) It remains the same.
Answer: C) It increases at a decreasing rate.
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6. What is the yield to maturity of a bond?
A) The bond's coupon rate divided by its price
B) The market interest rate
C) The discount rate that equates the bond's price to its future cash flows
D) The difference between the coupon rate and the market rate
Answer: C) The discount rate that equates the bond's price to its future cash flows
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7. A bond with a $1,000 face value has a coupon of $80 and is selling for $955.14. Which of the following is true about the bond's yield?
A) The yield to maturity is less than 8%.
B) The current yield is greater than the yield to maturity.
C) The yield to maturity is between 8% and 10%.
D) The bond is selling at a premium.
Answer: C) The yield to maturity is between 8% and 10%.
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8. What is the current yield of a bond with a coupon of $80 and a price of $955.14?
A) 8.00%
B) 8.38%
C) 9.00%
D) 7.50%
Answer: B) 8.38%
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9. Why is the current yield lower than the yield to maturity in the example provided?
A) Because the bond is selling at a premium
B) Because the bond's price is lower than its face value
C) Because the current yield considers only the coupon payments
D) Because the bond's maturity date is too close
Answer: C) Because the current yield considers only the coupon payments
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10. If a bond is selling at a discount, what can be inferred about its coupon rate compared to the market rate?
A) The coupon rate is higher than the market rate.
B) The coupon rate is equal to the market rate.
C) The coupon rate is lower than the market rate.
D) The coupon rate fluctuates with the market rate.
Answer: C) The coupon rate is lower than the market rate.
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1. What is a primary characteristic of debt securities?
A) They represent an ownership interest in the firm.
B) They provide creditors with voting power.
C) They must be repaid with interest.
D) They are tax-exempt.
Answer: C) They must be repaid with interest.
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2. What term is used to describe the person or firm that lends money to a corporation?
A) Debtor
B) Shareholder
C) Equity holder
D) Creditor
Answer: D) Creditor
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3. Which of the following is NOT a characteristic of equity securities?
A) They represent ownership interest in the firm.
B) They entitle holders to dividends.
C) They have a fixed interest payment.
D) Equity holders are paid after debt holders.
Answer: C) They have a fixed interest payment.
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4. What makes unpaid debt a liability for a firm?
A) It does not generate tax benefits.
B) Creditors can claim the firm’s assets if the debt is unpaid.
C) Interest payments are non-deductible.
D) It affects the equity value of the firm.
Answer: B) Creditors can claim the firm’s assets if the debt is unpaid.
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5. Why are interest payments on debt considered tax-deductible for corporations?
A) Interest is viewed as a return on equity.
B) Interest payments reduce taxable income.
C) Interest payments increase the firm's revenue.
D) Interest payments are a cost to shareholders.
Answer: B) Interest payments reduce taxable income.
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6. In the event of bankruptcy, who is paid first?
A) Equity holders
B) Creditors
C) Board members
D) Preferred shareholders
Answer: B) Creditors
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7. Which of the following securities is most likely to blur the distinction between debt and equity?
A) A bond with regular interest payments
B) A perpetual bond with interest payable only if income is earned
C) A bond with a maturity of 10 years
D) A common stock with voting rights
Answer: B) A perpetual bond with interest payable only if income is earned
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8. Why do corporations sometimes create hybrid securities that are treated as debt but have equity-like features?
A) To lower the interest rate on bonds
B) To obtain the tax benefits of debt and the bankruptcy protection of equity
C) To increase voting rights for debt holders
D) To maximize the interest earned on the security
Answer: B) To obtain the tax benefits of debt and the bankruptcy protection of equity
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9. What is the maximum reward for owning a debt security?
A) The amount of dividends paid
B) There is no upper limit
C) The amount of the loan
D) The value of the company's equity
Answer: C) The amount of the loan
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10. How do equity holders' claims differ from those of debt holders?
A) Equity holders are always paid first.
B) Equity holders have fixed payment rights.
C) Equity holders receive payments only after debt holders are paid.
D) Equity holders' risks are lower than debt holders'.
Answer: C) Equity holders receive payments only after debt holders are paid.
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1. What is the primary purpose of the indenture in a bond agreement?
A) To ensure dividends are paid to shareholders
B) To legally define the terms of the bond between the borrower and the lender
C) To determine the tax benefits of the bond
D) To set the market price for the bond
Answer: B) To legally define the terms of the bond between the borrower and the lender
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2. Who is typically responsible for ensuring the terms of the indenture are obeyed?
A) The bondholders
B) The company issuing the bond
C) The bond trustee, usually a bank
D) The company’s board of directors
Answer: C) The bond trustee, usually a bank
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3. Which of the following is a feature of bearer bonds?
A) Ownership is registered with the company.
B) The bondholder is required to present coupons for interest payments.
C) The bonds are considered more secure than registered bonds.
D) The company directly mails the payments to bondholders.
Answer: B) The bondholder is required to present coupons for interest payments.
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4. What is the risk associated with bearer bonds compared to registered bonds?
A) They cannot be transferred.
B) They are difficult to recover if lost or stolen.
C) The coupon payments are fixed.
D) They have a lower interest rate.
Answer: B) They are difficult to recover if lost or stolen.
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5. What does a call provision allow a company to do?
A) Issue more bonds without notifying bondholders
B) Call in or repurchase the bond issue at stated prices over a specific period
C) Increase the bond's face value during the bond’s life
D) Avoid paying bond interest under certain conditions
Answer: B) Call in or repurchase the bond issue at stated prices over a specific period
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6. What is a "make-whole" call provision in bond agreements?
A) A feature that prevents the company from calling bonds for a certain period
B) A provision that compensates bondholders based on the present value of remaining payments
C) A restriction that limits how long bonds can be called
D) A provision that allows bondholders to increase their coupon payments
Answer: B) A provision that compensates bondholders based on the present value of remaining payments
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7. Which of the following is an example of a negative protective covenant?
A) The firm must maintain its working capital at a certain level.
B) The firm cannot merge with another company without approval.
C) The firm must provide audited financial statements annually.
D) The company must maintain any collateral in good condition.
Answer: B) The firm cannot merge with another company without approval.
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8. What does a subordinated debenture imply?
A) It has higher priority than other debt.
B) It is paid after senior debt in the event of default.
C) It is secured by specific collateral.
D) It represents equity ownership in the firm.
Answer: B) It is paid after senior debt in the event of default.
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9. What is the main purpose of a sinking fund in bond agreements?
A) To pay dividends to equity holders
B) To retire a portion of the bond issue over time
C) To increase the face value of the bonds
D) To reduce the interest payments over time
Answer: B) To retire a portion of the bond issue over time
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10. What type of bond is secured by a mortgage on real property?
A) Debenture
B) Collateral trust bond
C) Mortgage bond
D) Subordinated bond
Answer: C) Mortgage bond
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