ch. 6, exam 2 smartbook

As an investor in the bond market, why should you be concerned about changes in interest rates? Multiple choice question. Changes in interest rates cause changes in bond prices. Changes in interest rates change the interest payments on fixed coupon bonds. Changes in interest rates lead to changes in the par value of a bond. You shouldn't be concerned as interest rate changes do not affect bonds.

Changes in interest rates cause changes in bond prices.

What is a bond's current yield? Multiple choice question. Current yield = Annual coupon/Par value Current yield = Annual coupon payment/Price Current yield = Annual coupon/Face value Current yield = Current price/Face value

Current yield = Annual coupon payment/Price

What is a discount bond? Multiple choice question. Discount bonds are junk bonds that are rated below investment grade. Discount bonds are bonds that sell for less than the face value. Discount bonds are bonds with short maturities. Discount bonds are bonds that a distressed corporation sells at fire sale prices to raise emergency funds.

Discount bonds are bonds that sell for less than the face value.

What is a real rate of return? Multiple select question. It is a rate of return that has been adjusted for inflation. It is a percentage change in buying power. It is an average rate of return on similar investments. It is a rate of return that has not been adjusted for inflation.

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

Which of the following are true about a bond's face value? Multiple select question. A bond's face value is the same for all corporations. It is also known as the par value. It is the principal amount repaid at maturity. It is the market value of the bond at the time of maturity.

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? Multiple choice question. It is the actual percentage change in the dollar value of an investment unadjusted for inflation. It is the average rate of return earned by similar investments. It is the rate of return earned in excess of the average rate of return earned by similar investments. It is the percentage change in the dollar value of an investment adjusted for inflation.

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

A bond's coupon payment is: Multiple choice question. a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders. a variable interest amount that is paid to bondholders based on the federal funds rate. interest that is paid by the bond issuer when a bond matures. a coupon that can be used by bondholders to receive discounts on goods produced by the corporation issuing the bonds.

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

If bonds for AT&T are quoted at 115, they can be purchased: Multiple choice question. at 115 percent of par value plus accrued interest. for $1150 for $115 per bond at 115 percent of current market price

at 115 percent of par value plus accrued interest.

Which three of the following are common shapes for the term structure of interest rates? Multiple select question. humped upward sloping downward sloping V-shaped

humped upward sloping downward sloping

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows Blank______. Multiple choice question. increases decreases remains unchanged

increases

The nominal rate is found by adding the Blank______ and the real rate of return. Multiple choice question. price inflation coupon discount

inflation

A corporate bond's yield to maturity: Multiple select question. is always equal to a bond's coupon rate. is usually not the same as a bond's coupon rate. changes over time. remains fixed over the life of the bond.

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

The bonds of a firm in financial distress may have a market value that is ___________ than the face value at maturity. (Enter only one word per blank.)

less

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is Blank______ $1,000. Multiple choice question. equal to more than less than

less than

A zero coupon bond is a bond that Blank______. Multiple choice question. is sold at a premium produces no taxable income has no market value makes no interest payments

makes no interest payments

Which one of the following is the most important source of risk from owning bonds? Multiple choice question. market interest rate fluctuations coupon interest rate fluctuations loss of a bond certificate mergers

market interest rate fluctuations

The term structure of interest rates examines the Blank______. Multiple choice question. relationship between short-term and long-term interest rates changes in bond values over time relationship between coupon rates and market yield relationship between par value and market price

relationship between short-term and long-term interest rates

What does a bond's rating reflect? Multiple choice question. the ability of the firm to repay its debt and interest on time the number of bonds issued by the corporation since its IPO the debt-equity ratio for the current year the quality of the bond relative to its competitors

the ability of the firm to repay its debt and interest on time

Which of the following variables is not required to calculate the value of a bond? Multiple choice question. market yield to maturity remaining life of bond coupon rate original issue price of bond

original issue price of bond

Which of the following variables is not required to calculate the value of a bond? Multiple choice question. original issue price of bond market yield to maturity remaining life of bond coupon rate

original issue price of bond

What are the cash flows involved in the purchase of a five-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. Multiple choice question. Pay $800 today and receive $800 plus $250 at the end of five years. Pay $800 today, receive $50 every year for five years, and receive $1,000 at the end of five years. Pay $800 today and receive $1,000 at the end of five years. Pay $800 today and receive $1,250 at the end of five years.

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

What are the cash flows involved in the purchase of a five-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. Multiple choice question. Pay $800 today, receive $50 every year for five years, and receive $1,000 at the end of five years. Pay $800 today and receive $800 plus $250 at the end of five years. Pay $800 today and receive $1,000 at the end of five years. Pay $800 today and receive $1,250 at the end of five years.

Pay $800 today and receive $1,000 at the end of five 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. Multiple choice question. R = r + h R = r − h R = r × h R = r/h

R = r + h

Which of the following are features of municipal bonds? Multiple select question. The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments. The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue. The interest on municipal bonds is always exempt from state taxes. They are not subject to default risk.

The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments. The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue.

Which of the following are true of bonds? Multiple select question. They are issued by both corporations and governments. They are normally interest-only loans. Bond principal does not have to be repaid.

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

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds? Multiple select question. Treasury bonds do not offer any tax benefits to investors, but corporate bonds do. Treasury bonds are considered free of default risk, while corporate bonds are exposed to default risk. Treasury bonds are issued by the U.S. government, while corporate bonds are issued by corporations. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.

Treasury bonds are considered free of default risk, while corporate bonds are exposed to default risk. Treasury bonds are issued by the U.S. government, while corporate bonds are issued by corporations. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.

What are the two unique features of a U.S. federal government bond? Multiple select question. U.S. Treasury issues are exempt from state and federal income taxes. U.S. Treasury issues are exempt from state income taxes. U.S. Treasury issues are considered to be default-free. U.S. Treasury issues are exempt from federal income taxes.

U.S. Treasury issues are exempt from state income taxes. U.S. Treasury issues are considered to be default-free.

What is a corporate bond's yield to maturity (YTM)? Multiple select question. YTM is the yield that will be earned if the bond is sold immediately in the market. YTM is the prevailing market interest rate for bonds with similar features. YTM is another term for the bond's coupon rate. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

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.

If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased Blank______. Multiple choice question. for $995 less any accrued interest for $99.50 per bond at 99.5 percent of face value plus any accrued interest for $995, which includes any accrued interest

at 99.5 percent of face value plus any accrued interest

What is a premium bond? Multiple choice question. a bond of superior quality a bond that sells for less than face value a bond that sells for more than face value a bond that is not risky and rated as investment grade

bond that sells for more

What are municipal bonds? Multiple choice question. Bonds issued by a corporation for state and local projects bonds that have been issued by state or local governments secured loans obtained from a local bank by state or local governments U.S. Treasury bonds that are only available in some states.

bonds that have been issued by state or local governments

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

coupon

Which of the following terms apply to a bond? Multiple select question. coupon rate dividend yield par value time to maturity

coupon rate par value time to maturity

What four variables are required to calculate the value of a bond? Multiple select question. coupon rate Price at the time of bond issue par value yield to maturity time remaining to maturity

coupon rate par value yield to maturity time remaining to maturity

The bid-ask spread represents the ______. Multiple choice question. dealer's profit difference between the coupon rate and the market rate bondholder's profit issuer's profit

dealer's profit

When interest rates in the market rise, we can expect the price of bonds to Blank______. Multiple choice question. increase decrease not change

decrease

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields? Multiple select question. interest rate risk premium inflation premium default risk premium liquidity premium

default risk premium liquidity premium

The ______ price is also called the "full" or "invoice" price.

dirty

True or false: The dirty price does not include accrued interest.

false

Bond ratings are based on the probability of default risk, which is the risk that Blank______. Multiple choice question. the bond's issuer may not be able to make all the required payments the bond's maturity may change inflation may increase in the short term the bond's interest rates may change unexpectedly

the bond's issuer may not be able to make all the required payments

The term structure of interest rates describes Blank______. Multiple select question. the relationship between nominal rates and time to maturity the relationship between rates on corporate bonds and Treasury bonds the relationship between real interest rates and inflation the pure time value of money the relationship between nominal rates of interest and inflation

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

If a $1,000 par value bond is trading at a premium, the bond is: Multiple choice question. trading for $1,000 in the market. not actively traded due to its high price. trading for less than $1,000 in the market. trading for more than $1,000 in the market.

trading for more than $1,000 in the market.

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.

true

What is the asked price? Multiple select question. It is the percentage change in a bond's price since its issue. It is the price at which an investor can buy a particular security from a dealer. It is the price at which a dealer is willing to buy a particular security. It is the price at which a dealer is willing to sell a particular security.

It is the price at which an investor can buy a particular security from a dealer. It is the price at which a dealer is willing to sell a particular security.