Financial Management - Study Mode

[#461] A usage of proceeds of new issue to retire issue with high-rate is classified as
Correct Answer

(A) refunding operation

Explanation

Solution: A usage of proceeds of new issue to retire issue with high-rate is classified as refunding operation. Refunding is the process of retiring or redeeming an outstanding bond issue at maturity by using the proceeds from a new debt issue. The new issue is almost always issued at a lower rate of interest than the refunded issue, ensuring significant reduction in interest expense for the issuer.

[#462] If default probability is zero and bond is not called then yield to maturity is
Correct Answer

(D) equal to expected return rate

Explanation

Solution: If default probability is zero and bond is not called then yield to maturity is equal to expected return rate. The return on an investment as estimated by an asset pricing model. It is calculated by taking the average of the probability distribution of all possible returns.

[#463] Rate of return (in percentages) is consists of
Correct Answer

(A) capital gain yield interest yield

Explanation

Solution: Rate of return (in percentages) is consists of capital gain yield interest yield. A rate of return (RoR) is the net gain or loss on an investment over a specified time period, expressed as a percentage of the investment's initial cost.

[#464] Reinvestment risk of bonds is usually higher on
Correct Answer

(B) callable bonds

Explanation

Solution: Reinvestment risk of bonds is usually higher on callable bonds. A callable bond is a bond that can be redeemed by the issuer prior to its maturity.

[#465] If market interest rate fall below coupon rate then bond will be sold
Correct Answer

(B) above its par value

Explanation

Solution: If market interest rate fall below coupon rate then bond will be sold above its par value. The prevailing rate of interest on loans determined by the demand and supply of credit and based on the duration (the longer the duration, the higher the rate) of loan and type of security offered (the higher the quality of security, the lower the rate).