1. If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at (Points : 3)

a rate less than 8% 8% a rate greater than 8% cannot be determined

Question 2.2. Two years ago, Trans-Atlantic Airlines sold $250 million worth of bonds at $1,000 each. The bonds had a maturity of 12 years and a coupon rate of 12%. Today these bonds are selling for $910. Determine the yield-to-maturity (to the nearest tenth of one percent). (Points : 3)

13.2% 5.6% 13.7% 12.0%

Question 3.3. Assume that the dividend on Central Power Company's $4.68 preferred stock issue is paid annually at the end of the year. Determine the value of this preferred stock to an investor who requires a 12 percent rate of return. (Points : 3)

$3.25 $39 $12 $27.08

Question 4.4. Strong debt covenants can reduce managerial flexibility and thus impose opportunity costs on the firm. (Points : 3)

The above statement is true. The above statement is false. The above statement can be true only if the management is incompetent. Debt covenants are unrelated to managerial flexibility.