chapter 7 review in book
feature of the OTC market for bonds
-OTC dealers are connected electronically -OTC has no designated physical location
what is true about a bonds face value>
-also known as the par value -principal amount repaid at maturity
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
-asked price -bid price
a corporate bond's yield to maturity __
-changes over time -can be greater than, equal to, or less than the bonds coupon rate
how is a conventional bond different from a zero coupon bond?
-conventional bonds can sell at par, at a discount from par, or at a premium over par while zeroes must be offered at a discount from par. -conventional bond pays periodic interest whiles zeroes make no interest payments
what variables are required to calculate the value of a bond
-coupon rate -remaining life of bond -market yield
what is required to calculate the current value of a bond?
-coupon rate -time remainig to maturity -par value -applicable market rate
what are two unique features of a US fed govt. bond
-exempt from state income taxes -considered to be default free
what are some reasons why the bond market is so big?
-fed govt. borrowing activity in the bond market is enormous -various state and local govt. also participate in the bond market. -many corporations have multiple bond issues outstanding
what are some common protectiv covenants?
-form cannot merge with any other firm -firm must limit dividends to equity holders -firm must maintian working capital at or above a specified level
All junk bonds typically have which of these features?
-high profitability of default -less than investment-grade rating
sources of information for generating bond ratings
-info collected by bond rating agency -info from the corp. being rated
what 6 factors determine the yield on a bond?
-interest rate risk -taxability -real rate of return -default risk -expected future inflation -liquidity
what are 3 components of the treasury yield curve?
-interest rate risk premium -expected inflation -real rate of return
features of municipal bonds
-issued by state and local governments -interest on municipal bodns is exempt from federal taxes
how significant is the real rate of return in determining the shape of the term structure of interest rates?
-less signifcant than inflation -not very significant
How is a zero coupon bond different from a conventional bond?
-make no interest payments -always issued at discount
what is included in the calculation of a bonds yield to maturity
-par value -current price -coupon rate
what institutions issue bonds that are traded at the bond market?
-public corporations -federal government -state governments
3 components of nominal rate of return
-real rate of return -compensation for the inflation effect on the original investment -compensation for the inflation effect on the investment earnings
what are three important features of treasury notes and bonds
-taxable -default free -highly liquid
what is a corporate bonds yield to maturity(YTM)
-the expected return for an investor who buys the bond today and holds it to maturity -the prevailing market interest rate for bonds with similar features.
what is usually included in a bonds indenture?
-total amount of bonds issued -repayment arrangements
when the US government wants to borrow money for long-term (more than one year) it issues:
-treasury notes -treasury bonds
how significant is the inflation premium on the shape of the term structure of interest rates?
-very significant -more significant than the real rate of return
structured note
Based on financial securities, commodities, or currencies
what are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
what does the clean price for a bond represent?
The quoted price, which excludes interest accrued since the last coupon date
T/F stock market is more transparent than the bond market
True
Does this correctly identify differences between US treasury bond and corporate bonds? Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk.
Yes
Does this correctly identify differences between US treasury bond and corporate bonds? Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer.
Yes
Does this correctly identify differences between US treasury bond and corporate bonds? Treasury bons are issued by the US government while corporate bonds are issued by corporations.
Yes
what will the impact be on your risk exposure if your bond has recently been categorized as a "fallen angel"?
Your risk will increase
a bonds YTM will exceed its current yield when the bond is selling at
a discount
what is a real rate of return?
a rate of return that has been adjusted for inflation
what does a bonds rating reflect
ability of the firm to repay its debt and interest on time
how is an original issue discount bond different from a zero coupon bond>?
an OID has a very low coupon rate, while a zero bond pays no coupon
when an investor sells a bond, the price received by a dealer is alwasy the
bid price
what are original issue discount bonds
bonds that are issues with a very low coupon rate
the amount by which the call price exceeds the par value of the bond is called
call premium
Convertible bond
can be exchanged for shares of stock
as an investor in the bond market, why shouldn you be concerned about changes in interest rates?
changes in interest rates cause changes in bond prices
what is teh difference between a bonds "clean price" and its "dirty price"
clean price excludes interest accrued since the last coupon payment, while the dirty price includes accrued interest
in general, what will have a higher pretax yield?
corporate bond
How has TRACE improved transparency in the corporate bond market?
corporate bond dealers are now required to report trade infromation through TRACE
the bid-ask spread represents the
dealers profit
a firms bond rating sheds light on its __ risk
default
the liquidity premium compensates investors based on a bonds
degree of marketability
T/F In internal rate risk, all else equal,the lower the ocupon rate, the lower the interest rate risk
false
T/F a bonds value is not affected by changes in the market rate of interest
false
T/F inflation premium will be hgiher if the rate of inflation is low
false
The interest from a municipal bond is exempt from ____ income taxes.
federal
in an inflationary environment, the nominal rate will be ____ the real rate
greater than
A bond with a BBB rating has a ___ than a bond with an A rating.
higher risk of default
what are 3 common shapes for the term structure of interest rates?
humped, upward sloping, downward sloping
if you were classified as a high income/high tax bracket investor, you might find municipal bonds an attractice investment because
income from municipal bonds is exempt from federal taxes
according to the approximation formular for the nominal rate of return (r), the nominal rate will ___ if inflation (h) increases
increase
A humped term structure of interest rates indicates that interest rates are expected to _____ as the time to maturity increases.
increase and then decline
a bonds yield to maturity considers the interest earnings and the change in the bond's price while teh current yield considers
interest earnings only
accrued interest
interest that has been earned but not yet received
the relationship between bond prices and the market rate of interest is
inverse; if the market rate of interest rises, bond prices will fall
in general, a corporate bonds coupon rate
is fixed until the bond matures
the federal government can raise money from financial markets to finance its deficits by
issuing bonds
what is true about a multi-year typical bonds coupon
it is a fixed annuity payment
definition of a bonds time to maturity
it is the number of years until face value is due to be repaid
what is the likely impact on all interest rates when the real rates are high?
it will increase
If a $1000 par value bond is trading at a discount, it means that the market value of the bond is (equal to, less than, or more than) $1000.
less than
If the term structure of interest rates is upward-sloping, then ____.
long-term rates are higher than short-term rates
The reason that interest rate risk is greater for ____ term bonds than for ____ term bonds is that the change in rates has a greater effect on the present value of the ___ than on the present value of the ____.
long; short, face value; coupon payments
a zero-coupon bond is a bond that
makes no interest payments
most important source of risk from owning bonds
market interest rate fluctuations
what order are bonds listed in order of security as defined in the US
morgage then debentures
what is not a difference between debt and equity>
Equity is publicly traded while debt is not
Does this correctly identify differences between US treasury bond and corporate bonds? Treasury bonds do not offer any tax benefits to investors but corporate bonds do
No
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
what does the AAA rating assigned by S&P mean
The firm is in a strong position to meet its debt obligations
The rates on financial securities are generally quoted as:
nominal rates
the default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might
not make all the promised payments
Put bond
owner can force issuer to repay prior to maturity at a stated price
CAT bond
protects insurance companies from natural disasters
2 major forms of long-term debt
public issue and privately places
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ___________ rate.
real
a sinking fund is one type of
repayment provision
teh taxability premium is the additional compensation demanded on
taxable bonds
what is the largest security market in the world in terms of trading volume?
the US Treasuries market
assume you own a bond that was issued by a blue-chip company. if the market rate of interest rises, what will happen to the value of your bond?
the bond value will fall
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bonds issuer may not be able to make all the required payments
the Fisher effect decomposes the nominal rate into
the inflation rate and the real rate
What does a Moody's bond rating of C typically indicate?
the issuer is in default
if you own corporate bonds, you will be concerned about interest rate risk as it affects
the market pirce of the bonds
what is the asked price
the price at which a dealer is willing to sell
T/F In internal rate risk, all else equal, the longer the time to maturity, the greater the interest rate risk
true
T/F In internal rate risk, all else equal, the lower the coupon rate, the greater the interest rate risk
true
T/F if you invest in a bond that is rated AAA by S&P, you can be reasonably assured that your investment has very little default risk
true
T/F in general, the stock market is more transparent than the real estate market
true
T/F interest earned on Treasury notes and bonds is taxable
true
T/F the major difference between western financial practices and islamic law is that islamic law does not permit charging or paying interest
true
T/F: In general, the price that is paid for a bond will exceed its quoted price
true
T/F: The price you actually pay to purchase a bond will generally exceed the clean price
true
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
twice a year
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
