Long Term Securities Paper 3

1

Bonds in which the principal amount is paid as a series of installments over the life of the bond issue are called






2

Wilson Corporation issued bonds two years ago. If the _______ interest rate _______, the market value of the bond will decrease.






3

DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment:
• Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par.
• Use $35 million of funds generated from earnings.
The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
The before-tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is






4

The best reason corporations issue Eurobonds rather than domestic bonds is that






5

Which of the following provisions is generally considered detrimental to the investor?






6

Which of the following is not an advantage of leasing as a form of financing?






7

Nerco has a bond issue that matures in fifteen years. Recently, the company’s bond rating has gone from B to Baa. How would this affect the market price of the bonds?






8

Watco, Inc. issued $1,000,000 in 8% bonds, maturing in ten years and paying interest semiannually. The bonds were issued at face value. What can you assume about the interest rates at the time the bonds were issued?






9

Watco, Inc. issued $1,000,000 in 8% bonds, maturing in ten years and paying interest semiannually. The bonds were issued at face value. If the market rate of interest for this type of bond increases to 9%, which of the following is true?






10

Watco, Inc. issued $1,000,000 in 8% bonds, maturing in ten years and paying interest semiannually. The bonds were issued at face value. Assume that one of Watco’s bonds with $1,000 face is currently selling for $950. What is the current yield on the bond?






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