7. A protective covenant: A. protects the borrower from unscrupulous practices b
ID: 2616832 • Letter: 7
Question
7. A protective covenant: A. protects the borrower from unscrupulous practices by the lender B. is designed to protect the bond dealer from potential legal liability related to the bond issue. C. prevents a bond from being called. D. limits the actions of the borrower. E. guarantees that a bond will be repaid in full with interest. 8. An upward-sloping term structure of interest rates indicates: A. the real rate of return is lower for short-term bonds than for long-term bonds. B. there is an indirect relationship between real interest rates and time to maturity C. there is an indirect relationship between nominal interest rates and time to maturity D. the nominal rate is declining as the real rate rises as the time to maturity increases. E. the nominal rate is increasing even though the real rate is constant as the time to maturity increases. The term structure of interest rates is affected by which of the following? I. Interest rate risk premium Il. Real rate of interest III. Default risk premium IV. Inflation premium A. I and II only B. II and III only C. I, III, and IV only D. I, 1I, and IV only E. I, II, III, and IVExplanation / Answer
7. A protective covenant limits the actions of the borrower
Therefore correct answer is option: D. limits the actions of the borrower.
A protective covenant is part of debt issued by the companies and its limits curtains actions of the companies. Protective covenants are of two types; positive and negative. Positive covenants states the actions that company can take and negative covenants states the actions that company cannot take.
8. An upward-sloping term structure of interest rates indicates that the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
Therefore correct answer is option: E. The nominal rate is increasing even though the real rate is constant as the time to maturity increases.
When term-structure is upward sloping then short-term interest rates are expected to rise in the future as it increases inflation expectation and long-term rates are more than the short-term rates.
9. The term structure of interest rates is affected by which of the following?
Term structure of interest rates is affected by interest rate risk premium, real rate of interest and inflation premium.
Therefore correct answer is option: D. I, II and IV only.
The term structure of interest rates shows the relationship between pure discount bonds, time to maturity and nominal rates on default free bonds therefore it is not affected by default risk premium.
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