1 Falling interest rates a are a long term financial risk fo

1) Falling interest rates

a. are a long term financial risk for firms.

b. increases the WACC.

c. increase the value of already issued bonds.

d. are a short term operational risk for firms.

2) Financial managers need to analyze the yield curve in order to

      A. value already issued bonds.

      B.   help them make the decision whether to issue short-term bonds or long-term bonds.

      C. determine whether the stock-market is going to crash.

      D. estimate the long term financial risk for the firm.

3)   The impact of more capital from abroad entering the US bond market is

      A. lower interest rates.

      B.   higher interest rates.

      C. less capital availability.

      D. a higher WACC.

4)   You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain?

A. 14

B. 15

C. 12

D. 20

Solution

1)

Correct option is > c. increases the value of already issued bonds.

Bond price and interest rate has inverse relationship hence falling interest rate will have positive impact on issued bond prices.

.

2)

Correct option is > D. estimate the long term financial risk for the firm

Yield curves represent risk on time scale. The yield expectations are plotted to study the curvature.

.

3)

Correct option is > B. higher interest rates.

Higher interest rate attracts the investors hence more capital flows.

.

4)

Correct option is > B. 15

Using financial calculator BA II Plus - Input details:

#

FV = Future Value =

-$1,000.00

PV = Present Value =

$847.88

I/Y = Rate / Frequency =

10.000000

PMT = Payment or coupon or regular payment / frequency =

-$80.00

CPT > N = Total number of period =

                   15.00