Business Finance Exam 3 Conceptual Stuff (HW & Practice Exam)

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon

Which one of the following is the price at which a dealer will sell a bond?

Asked price

Which one of the following is the price at which a dealer will buy a bond?

Bid Price

Which of the following bonds has the most price risk? A. 7-year bonds with a 5% coupon B. 3-year bonds with a 5% coupon C. 15-year zero coupon bonds D. 15-year bonds with a 10% coupon

C

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

Face value

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest decreases, then the:

Market price of the bond will increase

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

Which one of the following statements is correct?

The real rate must be less than the nominal rate given a positive rate of inflation.

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Two months' interest

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

You will realize a capital gain on the bond if you sell it today.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero coupon

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

a discount; less than

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price.

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk.

A zero coupon bond:

has more interest rate risk than a comparable coupon bond.

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

inflation

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

market price of the bond will decrease.

The current yield is defined as the annual interest on a bond divided by the:

market price.

A bond's principal is repaid on the ________ date.

maturity

Municipal bonds:

pay interest that is federally tax free.

A Treasury yield curve plots Treasury interest rates relative to:

time to maturity.