Question

TRUE OR FALSE

______ A downward-sloping yield curve reflects expectations of higher future inflation

and higher future interest rates.

______ The “bond indenture” is a legal document that specifies the rights of the

bondholders and the duties of the issuing corporation.

______ In general, the shorter a bond’s maturity, the higher the interest rate or cost

to the issuing corporation.

______ Rising interest rates in the economy cause the market value of outstanding bonds

to also increase.

______ The holders of bonds issued by a given corporation are also the owners of the firm.

______ Equity capital, such as common stock, is a permanent form of financing for a

corporation, as it never has to be repaid and it has no maturity date.

______ Interest paid to bondholders is tax-deductible to the issuing corporation, which

lowers the cost of debt financing if the firm is profitable.

______ The payment of dividends to common stockholders by a corporation is at the

discretion of the firm’s Board of Directors.

______ Similar to common stock, the dividend payment on preferred stock typically varies

from year to year.

______ Preferred stock is often referred to as a “hybrid” security, as it has characterizes of

both common stock and bonds.

Answer 1

1.

Yield curve is downward when short-term yield on bond is higher than long term yield on bond. Downward Yield curve mean there is chance of chance of recession in economy and that why investor has very less confidence on economy. So, A downward-sloping yield curve reflects expectations of lower future inflation and lower interest rate in future.

Statement is false.

2.

The “bond indenture” is a legal document that specifies the rights of the bondholders and the duties of the issuing corporation.

Statement is true.

3.

There is direct relationship between Bond interest rate risk and maturity of bond. For long maturity bond the probability of interest rate is higher than for short term bond. So interest rate risk for long term bond is higher than short term bond.

Longer period bond higher interest rate risk.

Shorter period bonds lower interest rate risk.

Statement is false.

4.

The relationship between bond price and Yield to maturity is an inverse relationship. That is when YTM increases bond price decreases and when YTM decreases Bond price increases. So, rising interest rates in the economy cause the market value of outstanding bonds is to decrease.

Statement is false.