1) While playing racquetball, a friend of yours tells you about a bond that is paying coupons of $100 annually and has a YTM of 6.8%. You don't need your financial calculator to know.

a) that this bond is priced at a discount.

b) that this bond is not in high demand, despite what your friend says

c) that this bond is priced at a premium.

2) Which of the following is an important reason why firms value using at least some debt in their capital structure?

a) Interest on bonds is paid before taxes are determined, and so this represents a small increase in the cost of debt capital by (1 + tax rate).

b) Issuing bonds triggers analysis by the ratings agencies, and shareholders like knowing that the agencies are monitoring the financial health of the firm.

c) Most large corporations are required by their charters to obtain a specified proportion of debt in their capital structure.

3) Generally, how is capital allocated in a market system?

A) Based on government authorities, who have special super powers that allow them to act on behalf of the people while ignoring their own personal interests.

B) Based on the individual interests of suppliers and demanders

d) Suppliers and demanders signal their individual interests and then government authorities make the final decision.