Financial Instruments Paper 3

1

A firm is planning to issue a callable bond with an 8% coupon rate and 10 years to maturity. A straight bond with a similar rate is priced at 1,000. If the value of the issuer’s call option is estimated to be $50, what is the value of the callable bond?






2

Which one of the following is a debt instrument that generally has a maturity of 10 years or more?






3

The call provision in some bond indentures allows






4

Protective clauses set forth in an indenture are known as






5

A requirement specified in an indenture agreement that states that a company cannot acquire or sell major assets without prior creditor approval is known as a






6

Dorsy Manufacturing plans to issue mortgage bonds subject to an indenture. Which of the following restrictions or requirements are likely to be contained in the indenture?
I. Receiving the trustee’s permission prior to selling the property.
II. Maintain the property in good operating condition.
III. Insuring plant and equipment at certain minimum levels.
IV. Including a negative pledge clause.






7

Which one of the following statements concerning debt instruments is correct?






8

Which one of the following provides the best measure of interest rate risk for a corporate bond?






9

What variable is measured on the horizontal axis of the yield curve?






10

Which one of the following would be the most appropriate discount rate for an investment deemed to have moderate risk?






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