TRUE/FALSE

1. Valuation is a systematic process through which we establish the prices at which stocks and bonds should sell

B. Determining the market price of a financial asset depends principally on identifying the future cash flows associated with its ownership.

C. A security's value is equal to the present value of its expected future cash flows discounted by an appropriate rate of return.

D. Because stocks rely on dividends as the principal source of cash flow, ascertaining stock prices is an easier and more precise process than the valuation of bonds, which relies on variable coupon payments.

E. Assuming a one year investment, the formulation for arriving at return is either FV₁ = PV + kPV or FV₁ = PV(1+k).

F. The rate of return offered by a security is the interest rate that makes the present value of the security's future cash flows equal to its selling price.

A. The term "yield" relates only to investments whose holding period extends beyond one year, whereas "rate of return" typically relates to shorter-term investments.

B. A bond's yield and coupon rate vary over time depending on market and economic conditions.

C. Due to the mechanics of printing and issuing bonds, bond coupon rates do not always equal current market interest rates.

D. The call premium is also known as call protection.

E. The longer the time to maturity, the smaller the maturity risk associated with a bond.

F. Coupon rates and payments are generally fixed throughout the life of a bond regardless of the economic or market conditions.

A. Holding all other variables constant, as market interest rates increase, bond prices decrease.

B. A bond selling at par will have a yield to maturity equal to its current yield.

C. Bonds are referred to as amortized debt due to fact that interest and principal payments are made to the lender until maturity.

D. Call provisions are most likely exercised by the borrower when interest rates are falling.

E. The term coupon originated long ago when coupons were attached to bonds. When interest was due a bondholder would clip off a coupon and send it to the bond issuing company which would return an interest payment.

F. Registered bonds require that the names of owners be registered with a transfer agent. Bearer bonds belong to the person who possesses them.

A. Bond ratings measure the maturity risk associated with a given bond.

B. Convertible bonds allow the issuing company to convert outstanding bonds to shares of common stock when the company deems necessary.

C. The yield differential between high- and low-quality bonds tends to be larger in recessionary periods.

D. A minimum TIE is an example of a restrictive covenant.

E. Restrictive covenants increase risk to the bondholder.

F. Investors are given the option accepting calls on bonds with call features.

A. Issuing companies prefer having the option of retiring their debt whenever they wish. Therefore they include call features in their bonds.

B. When a call protection provision is written into the bond indenture, the issuing company is prevented from calling the bond throughout the bond's life.

C. Call penalties and call premiums are essentially interchangeable terms.

D. Sinking fund provisions often require the issuing company to call in and retire a percentage of the bond issue each year toward the end of a bond issue's life.

E. Bond ratings are primarily based on the issuing firm's financial projections.

F. Bond ratings below Moody's Baa and S&P's BBB are considered of lower quality and risky.