Question

1. For the issuing firm, which one of the following is WRONG about the disadvantages of using debt financing (bonds) versus equity financing (stocks)?

A) Debt holders have voting rights and could impact firm’s management decision.

B) Coupon payments must be paid to bondholders with specific amount and on time.

C) Face value payment must be paid to bondholders at the maturity date.

D) High default risk of going bankrupt with too much debt.

2. You will require the lowest risk premium from which one of the following bonds (assume other factors are the same except the Fitch rating)?

A) GM bonds with AA rating.

B) Treasury bonds with AAA rating.

C) Six Flags bonds with C rating.

D) Springfield municipal bonds with BB rating.  

3. The following information for Six Flags bonds is listed on Wall Street Journal: Maturity Date Yield to Maturity Current Yield Coupon Rate 04/07/2020 8% 9.17% 10% If you purchase the bond today and hold it till maturity date, what is your annual return rate (APR) on the investment from now to April 2020?

A) Not enough information to calculate.

B) 10%

C) 9.17%

D) 8% ( )

4. Using the information given in Question 3 about Six Flags bonds, which one of the following statements about bond price is correct?

A) Bond price is lower than $1000.

B) Bond price is $1000.

C) Bond price is higher than $1000.

D) Not enough information to calculate.

5. As of today (November), the exchange rate of Mexican Peso is 1peso=0.08$. Suppose you will visit Mexico in December 2017 and notice the exchange rate in the local bank 1$=13peso. Which one of the following statement is correct according to the observations?

A) Peso’s value increased against US dollar from Nov to Dec.

B) Peso depreciated against US dollar from Nov to Dec.

C) US dollar depreciated against Peso from Nov to Dec.

D) Each US dollar can exchange you less Pesos in Dec than in Nov.

Answer 1

1) (A) Debt holders have voting rights and could impact firm’s management decision.

This statement is wrong as the bond holders doesn't have the right to vote generally.

2) (B) Treasury bond with AAA rating

3) (D) 8% - As we are calulating the Annual return rate till april 2020 (i.e. the maturity date of bonds) is yield to maturity date.

4) (D) Not enough information to calculate

5) (B) Peso depreciated against US dollar from Nov to Dec

In Nov 1 Peso = 0.08 $

1$ = 1/0.08 Peso

In Nov 1$ = 12.5 Peso

In Dec 1$ = 13 Peso

It is clear from above rates that value of peso has decreased in terms of dollars.