Exam 2 Materials

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:

Market price of the bond will decrease

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

Maturity

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

Next year's

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

3-year; 6 percent coupon

All else constant, which one of the following will result in the lowest present value of a lump sum?

8 percent interest for 10 years

Chavez & Hwang just issued 15-year, 6.4 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

Discounting

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

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

Market price

A Treasury yield curve plots Treasury interest rates relative to:

Time to maturity

Bonds issued by the U.S. government:

Are considered to be free of default risk.

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

Cannot lease any major assets without bondholder approval

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound Interest

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

Compounding

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

Coupon

Which one of the following relationships applies to a par value bond?

Coupon rate = Current yield = Yield to maturity

Interest rates that include an inflation premium are referred to as:

Nominal rates

Ernst & Frank stock is listed on Nasdaq. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the:

Protective covenants

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?

The current yield exceeds the coupon rate

The secondary market is best defined as the market:

Where outstanding shares of stock are resold

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < Coupon rate

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

Zero coupon