Business Finance Ch. 6

Coupon

A bond's _____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

A bonds coupon payment is:

- is usually not the same as a bond's coupon rate - changes over time

A corporate bond's yield to maturity:

ownership

Equity represents a(n) _____ interest of a firm.

longer-term

The interest rate risk premium is the additional compensation demanded by investors for holding ____ bonds.

Bonds that have been issued by state or local governments

What are municipal bonds?

unsecured

A debenture is a(n) _____ bond, for which no specific pledge of property is made.

less than

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______$1,000.

5%

If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.

with a lag to some base rate

Most of the time, a floating-rate bond's coupon adjusts ____.

Treasury bonds, and treasury notes.

The US government borrows money by issuing:

Less

The bonds of a firm in financial distress may have a market value that is _____than the face value at maturity.

False

True or false: A debenture is a bond secured with collateral.

true

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: Investors require a premium for the risk that issuers other than the Treasury may not make all promised payments on the issued bonds.

it is known as the par value and is the principal amount repaid at maturity

Which of the following are true about a bond's face value?

They are issued by both corporations and governments They are interest-only loans

Which of the following are true of bonds?

municipal bond

Bonds issued by state and local governments are called _______ ______.

annuity present value

To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments.

False

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.

call provision

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________.

Coupon Rate

Which of the following terms apply to a bond?

-Inflation premium -Real interest rate -Interest rate risk premium

Which three components determine the shape of the term structure of interest rates?

inflation

The nominal rate is found by adding the _____ and the real rate of return.

the Fisher effect

The relationship between nominal rates, real rates and inflation is called ________ .

Time to Maturity Coupon rate

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

Changes in interest rates cause changes in bond prices.

As an investor in the bond market, why should you be concerned about changes in interest rates?

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

True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.

-The repayment arrangements -The total amount of bonds issued

Which of the following are usually included in a bond's indenture?

-time to maturity -par value -coupon rate

Which of the following terms apply to a bond?

-interest is tax deductible -dividends are not tax deductible

A key difference between interest payments and dividend payments is?

-The maximum reward for owning debt is fixed. -Equity represents an ownership interest.

As a general rule, which of the following are true of debt and equity?

The 10 year bond

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?

relationship between short-term and long-term interest rates

The term structure of interest rates examines the ____.

Increases

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.

decrease

When interest rates in the market rise, we can expect the price of bonds to ____.

Upward sloping

When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?

-a put bond -a convertible bond -a CoCo bond

Which of the following are bonds that have actually been issued?

-it is a rate of return that has been adjusted for inflation -it is a percentage change in buying power

What is a real rate of return?

R = r + h

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

-private issue -public issue

What are the two major forms of long-term debt?

makes no interest payments

A zero-coupon bond is a bond that ____.

adjustable

The coupon payments on floating-rate bonds are _____.

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

the sensitivity of the bond's price to interest rate changes

The degree of interest rate risk depends on ____.

(1 + R) = (1 + r)×(1 + h)

The model that precisely specifies the relationship between the nominal rate and the real rate is: R = the nominal rate r = the real rate h = the rate of inflation

The real rate of return Expected future inflation The interest rate risk premium

What are the three components that influence the Treasury yield curve?

It shows the yield for different maturities of Treasury notes and bonds

What does a Treasury yield curve show?

Sometimes short-term rates are higher and sometimes long-term rates are higher.

What does historical data suggest about the nature of short-term and long-term interest rates?

Par value Yield to Maturity Coupon rate Time remaining maturity

What four variables are required to calculate the value of a bond?

Current yield = annual coupon payment / current price

What is a bond's current yield?

-the pure time value of money -the relationship between nominal rates and time to maturity

The term structure of interest rates describes ________.

Many bond transactions are negotiated privately.

Why is the bond market less transparent than the stock market?

0%

If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes

The bond with a 5% coupon rate

If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?

It is the additional return demanded by investors to compensate for expected inflation

What is the inflation premium?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

What is the nominal rate of return on an investment?

Equity is publicly traded while debt is not

Which of the following is not a difference between debt and equity?

No coupon payments are made on the bonds

Which of the following is true of zero coupon bonds?

-Default risk premium -Liquidity premium

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?

-OTC dealers are connected electronically. -The OTC has no designated physical location.

What are some features of the OTC market for bonds?

Pay $800 today and receive $1,000 at the end of 5 years

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.

-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.

What is a corporate bond's yield to maturity (YTM)?

are bonds that sell for less than the face value

What is a discount bond?

Original issue price of bond

Which of the following variables is NOT required to calculate the value of a bond?

Market interest rate fluctuations

Which one of the following is the most important source of risk from owning bonds?

-humped -upward sloping -downward sloping

Which three of the following are common shapes for the term structure of interest rates?