1. Empirical evidence shows that forward rates are A. upward-biased predictors o
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Question
1. Empirical evidence shows that forward rates are
A. upward-biased predictors of future spot rates
B. downward biassed predictors of future spot rates
C. unbiased predictors of future spot rates
2. Empirical evidence suggests that historically, short-term T-notes trade at higher yields relative to long-term T-notes or T-bonds most of the time. True or False?
3. Company X operates in a highly competitive industry, in which no company has a significant market share, and where there are low barriers to entry. Which of the following best describes company X's ability to take on substantial debt?
A. Its ability is high because companies in industries with those characteristics typically have high operating margins and cash flows that can support significant debt levels.
B. Need more information
C. Its ability is limited because companies in industries with those characteristics generally cannot support high debt levels.
4. Which of the following would not be a bond covenant?
B. All the others would be typical bond covenants
C. the company's debt-to earnings ratio may not exceed a certain threshold
D. The company can issue new debt as much as the management likes.
A. The company must file financial statements with the bond trustee on a regular and timely basis.Explanation / Answer
1A
Empirically the future rates have shown to be a biased indicator of spot rates and are upward biased.
2: False
Due to longer tenure, the long term T bonds or notes carry greater risk and so carry higher yield than the short term bonds.
3: C
It ability to take debt will be limited due to high competition which poses a threat to the profits of the company and the low barriers to entry allows other companies to take away its market share.
4: D
A bond covenant ia an agreement which prohibits activities of the bondholder. Option A is a covenant since the issuer may ask for financial statements from time to time. Option C is a covenant since it limits the debt undertaken by the company. Option D is not a covenant since it is allowing rather than limiting the bondholder. So option C proves incorrect.
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