BA 303 CH 6-10
What are the three components that influence the Treasury yield curve?
The real rate of return Expected future inflation The interest rate risk premium
A bond's ____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
Coupon
What is a bond's current yield?
Current yield = annual coupon payment / current price
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
Which of the following variables is NOT required to calculate the value of a bond?
Original issue price of bond
Equity represents a(n) interest of a firm.
Ownership
Which of the following are bonds that have actually been issued?
a convertible bond a put bond a CoCo bond
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
The coupon payments on floating-rate bonds are __.
adjustable
A limitation of bond ratings is that they ____.
focus exclusively on default risk
A bond with a BB rating has a ______ than a bond with an BBB rating.
higher risk of default
A zero-coupon bond is a bond that ____.
makes no interest payments
Bonds issued by state and local governments are called _______ ______.
municipal bond
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
What four variables are required to calculate the value of a bond?
-Par value -Yield to Maturity -Coupon rate -Time remaining maturity
As a general rule, which of the following are true of debt and equity?
-The maximum reward for owning debt is fixed. -Equity represents an ownership interest.
Which of the following are usually included in a bond's indenture?
-The repayment arrangements -The total amount of bonds issued
What is a corporate bond's yield to maturity (YTM)?
-YTM is the expected return for an investor who buys the bond today and holds it to maturity. -YTM is the prevailing market interest rate for bonds with similar features.
A key difference between interest payments and dividend payments is?
-interest is tax deductible -dividends are not tax deductible
What is a real rate of return?
-it is a rate of return that has been adjusted for inflation -it is a percentage change in buying power
What are the two major forms of long-term debt?
-private issue -public issue
The term structure of interest rates describes ________.
-the pure time value of money -the relationship between nominal rates and time to maturity
Which of the following terms apply to a bond?
-time to maturity-par value-coupon rate
What are municipal bonds?
Bonds that have been issued by state or local governments
True or false: Bond ratings are concerned only with the possibility of price changes.
False
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.
Increases
The nominal rate is found by adding the _____ and the real rate of return.
Inflation
Which of the following are true about a bond's face value?
It is also known as the par value. It is the principal amount repaid at maturity.
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What is the definition of a bond's time to maturity?
It is the number of years until the face value is paid off
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds
What will happen to a bond's time to maturity as the years go by?
It will decline
The bonds of a firm in financial distress may have a market value that is than the face value at maturity.
Less
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years
What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate
R = r + h
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher.
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
Bond ratings are based on the probability of default risk, which is the risk that ___.
The bond's issuer may not be able to make all the required payments
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
Which of the following are true of bonds?
They are issued by both corporations and governments They are normally interest-only loans
The US government borrows money by issuing:
Treasury bonds, and treasury notes.
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
True or false: Current yield = Annual coupon payment/Price
True
True or false: Long-term debt has maturities greater than one year.
True
True or false: The government sells Treasury notes and bonds to the public every month.
True
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________.
call provision
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes