Ch 6 Video Questions and Interactive

If expected inflation rises, market interest rates will rise. How will this impact the prices and yields of existing bonds?

The prices of existing bonds will fall and the yields will rise.

T/F When comparing a 10-year bond versus a 1-year bond, the 10-year bond has a much greater interest rate risk.

True

A Put bond

Allows the holder to force the issuer to buy back the bond at a stated price.

An Income Bond

States that the bond's coupon payment depends on company income.

The term structure of interest rates includes all of the following basic components, except:

Weighted Average Cost of Capital

The price of a 12% semiannual coupon bond with five years to maturity and a yield to maturity of 8% is

$1,162.22

Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond?

10.46%

Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate?

13.88 %

Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity?

14%

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

18 %

Franklin Corporation has an opportunity to purchase bonds at a rate of 11%. They are in the 34% tax bracket. What is the after tax yield on these bonds?

7.26%

Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate?

8.25%

The catastrophe Bond

Covers hurricanes and earthquakes in the U.S.

When short-term rates are higher than long-term rates, we say it is __________________.

Downward sloping

Treasury issues are:

Exempt from state income taxes but, not federal income taxes.

The Fisher Effect has all of the following components, except: - Real Rate on the Investment, r - Compensation for inflation of Original Investment, h - Expected Rate of Return, E - Compensation for Inflation on Investment Earned

Expected Rate of Return, E

T/F Current Yield is a bond's annual coupon divided by its yield to maturity

False

T/F Municipal bonds are taxable for federal, state and local taxes.

False

A Warrant Bond

Gives the buyer of a bond the right to purchase shares of stock in the company at a fixed price.

The features of Municipal bonds make them attractive to high income, _________ bracket investors.

High-tax

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk.

Longer, Greater

Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the coupon rate, the _________ the interest rate risk.

Lower, greater

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.

Nominal

A convertible bond:

can be swapped for a fixed number of shares of stock anytime before maturity at the holder's option.

The present value of a bond or other debt instrument is

the value today of all the future cash flows from this investment.