F420 Chapter 14 Bond Prices and Yields

Select all that apply Which statements about preferred stock are true? (Multiple select question) A. Their dividends are tax deductible expenses to the issuing firms. B. Corporations may exclude 70% of dividends received from domestic corporations from taxable income. C. It conveys voting power regarding the management of the firm. D. It pays a fixed stream of income without a contractual obligation to make the payments.

B. Corporations may exclude 70% of dividends received from domestic corporations from taxable income. D. It pays a fixed stream of income without a contractual obligation to make the payments.

The ______ ______ is the present value of a single payment of $1 to be received in T periods.

PV factor

The interest rate that makes the present value of a bond's payments equal to its price is defined as the bond's ______ ______ ______

Yield to Maturity

The invoice price a buyer actually pays for the bond includes ______ ______

accrued interest

A particular asset that the bondholders receive if the firm defaults on a bond is the bond's ______

collateral

The number of shares for which each convertible bond may be exchanged is given by the _____ _____

conversion ratio

A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm is a(n) _____ bond.

convertible

he curvature of the price-yield relationship of a bond is referred to as its ______

convexity

The name for the derivative contract in which one party sells insurance concerning the credit risk of another firm is ______ ______ ______.

credit default swap

A bond's annual coupon payment divided by its price is defined as its ______ yield.

current

When a bond pays its coupon, ______ ______ equals invoice price because at the moment, accrued interest reverts to zero

flat price

A bond whose interest rate is reset periodically according to a specified market rate is a(n) _____-_____ bond.

floating-rate

A bond offered by a foreign borrower to the investors in a national capital market and denominated in that nation's currency is a(n) ______ bond issue.

foreign

The rate of return of a bond over a given period is referred to as its ______-period return.

holding

Forecasting the realized compound yield over various holding periods is referred to as ______ analysis.

horizon

The document defining the contract between the bond issuer and the bondholder is referred to as the bond _____

indenture

An indenture provision specifying requirements of collateral, sinking fund, dividend policy, etc., designed to guard the interests of bondholders is a(n) ______ ______

protective covenant

The yield on a bond and its reinvested coupons over the life of a bond is its ______ ______ ______

realized compound returns

The uncertainty surrounding the cumulative future value of bond payments when future rates are uncertain is referred to as ______ ______ risk.

reinvestment rate

A provision in a bond indenture that restricts the issuer's future borrowing by lessening the new lenders' claims on the firm relative to those of the existing bond holders is referred to as a(n) ______ clause.

subordination

A bond paying no coupons that sells at a discount and provides payment of face value only at maturity is referred to as a(n) _____-_____ bond.

zero-coupon

Original-issue discount bonds that are issued intentionally with low coupon rates that cause the bond to sell at a discount from par value are referred to as ______-______ bonds.

zero-coupon

What is the formula for the present value of a $1 annuity that lasts for T periods when the interest rate equals r? A. (1/r)[1 - (1/(1+r)^T)] B. r[1 - (1+r)^T] C. (1/r)[1 - (1+r)^T] D. r[1 - (1/(1+r)^T]

A. (1/r)[1 - (1/(1+r)^T)]

Select all that apply Which statements about realized compound return are correct? (Multiple select question) A. A bond's realized compound return generally cannot be calculated in advance. B. A bond's realized compound return will equal its yield to maturity if its coupons are reinvested at an interest rate equal to the YTM. C. The realized compound return of a zero-coupon bond equals its yield to maturity. D. The realized compound return of a bond is higher than its yield to maturity.

A. A bond's realized compound return generally cannot be calculated in advance. B. A bond's realized compound return will equal its yield to maturity if its coupons are reinvested at an interest rate equal to the YTM. C. The realized compound return of a zero-coupon bond equals its yield to maturity.

The extendability of a put bond makes the bond more valuable to ______. A. the issuer B. both the issuer and the bondholder C. neither the issuer nor the bondholder D. the bondholder

D. the bondholder

A bond denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency is a(n) _____ issue.

Eurobond

The difference between the promised yield on a corporate bond and the yield of an otherwise-identical government bond that is riskless is defined as the ______ premium.

default

When rates rise, bond prices ______ , which _____ the value of the portfolio. Reinvestment rate risk offsets ______ risk.

fall; reduce; price

The two most common liquidity ratios are the ______ ratio and the ______ ratio.

current; quick

Match the numbers with correct terms in the bond value formula as it is typically written. ∑1234∑2134+56

1. T 2. t = 1 3. Coupon 4. (1+r)^t 5. Par Value 6. (1+r)^T

For premium bonds, the coupon rate is ______ the current yield. A. less than B. greater than C. the same as

B. greater than

______ ratios measures rates of return on assets of equity and are indicators of a firm's overall financial health

Profitability

Match the financial instrument with its description

SIV -----> An off-balance sheet virtual bank, frequently operated by a commercial bank or an investment bank, that raises short-term funds to finance longer-term investment CDO -----> A pool of loans sliced into several tranches with different levels of risk CDS -----> A contract that provides insurance against the risk of default

The price of a bond is the sum of the ______ values of its coupon payments and par value. A. real B. annuity C. present D. future

C. present

Preferred stock has features similar to both _____ and _____ .

equity; debt

Select all that apply Which of the following statements regarding floating-rate bonds is not true? (Multiple select question) A. The yield spread is variable over the life of the security B. The coupon rate on floaters does not adjust to changes in the general level of market interest rates. C. Floating-rate bonds make interest payments tied to some measure of current market rates. D. Floating-rate bonds pay approximately current market rates.

A. The yield spread is variable over the life of the security B. The coupon rate on floaters does not adjust to changes in the general level of market interest rates.

When interest rates are positive, a zero-coupon bond will be issued at ______. A. a discount B. par C. a premium

A. a discount

A basic debt security is a ______. A. bond B. call option C. share of stock D. warrant

A. bond

Select all that apply Which of the following must an investor consider in the purchase of a bond that is not quoted a promised rate of return? (Multiple select question) A. coupon payments B. bond price C. rate of return over bond's life D. maturity date

A. coupon payments B. bond price D. maturity date

A bond that is not backed by specific collateral is a(n) ______ bond. A. debenture B. mortgage C. equipment obligation D. secured

A. debenture

Select all that apply When the interest rate ______, the price of a bond will ______. (Multiple select question) A. decreases; increase B. decreases; decrease C. increases; decrease D. increases; increase

A. decreases; increase C. increases; decrease

A firm will call its bonds when interest rates ______. A. fall B. rise C. remain the same

A. fall

Select all that apply Bonds with low credit ratings are referred to as ______. (Multiple select question) A. junk bonds B. investment-grade C. risk-free D. speculative-grade

A. junk bonds D. speculative-grade

Since a bond is a series of cash flows, an increase in the interest rate makes all of the cash flows _____ valuable and ______ the price of the bond. A. less; reduces B. less; increases C. more; increases D. more; reduces

A. less; reduces

Select all that apply The forecast of total return depends on your forecasts of (Multiple select question) A. price of the bond when you sell it at the end of your horizon B. the rate at which you are able to reinvest coupon income C. a longer investment horizon

A. price of the bond when you sell it at the end of your horizon B. the rate at which you are able to reinvest coupon income

Select all that apply A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years is known as a(n) ______ bond. (Multiple select question) A. put B. extendable C. puttable D. convertible

A. put B. extendable C. puttable

A convertible bond becomes more valuable to the bondholder when stock prices ______. A. rise B. remain the same C. fall

A. rise

The ability of an issuer to call a bond makes the bond more valuable to ______. A. the issuer B. the bondholder C. both the issuer and the bondholder D. neither the issuer nor the bondholder

A. the issuer

Select all that apply For what purposes are credit default swaps bought or sold? (Multiple select question) A. To exchange currencies at a specified future date B. To hedge default risk C. To speculate that a firm is in a better financial condition than generally believed D. To hedge interest rate risk

B. To hedge default risk C. To speculate that a firm is in a better financial condition than generally believed

Grant Manufacturing has issued two bonds recently, one that is callable and one that is not. The callable bond is most likely to have ______. A. a lower coupon rate B. a higher yield to maturity C. a longer time to maturity

B. a higher yield to maturity

Select all that apply The risk that an issuer will not fully make a bond's promised payments is referred to as ______ risk. (Multiple select question) A. duration B. credit C. default D. reinvestment

B. credit C. default

Select all that apply A claim on a specified periodic stream of income is a(n) ______ security. (Multiple select question) A. derivative B. fixed-income C. debt D. equity

B. fixed-income C. debt

When bonds are subject to potential default, the stated yield to maturity is the ______ yield to maturity that can be realized by the bondholder. A. minimum possible B. maximum possible C. average historical

B. maximum possible

The slices of pooled loans used by CDOs to create safer and riskier securities are referred to as ______. A. SIVs B. tranches C. mezzanines D. CDS contracts

B. tranches

Match the bond name with its description.

Bulldogs ----> Pound sterling-denominated foreign bonds sold in the UK Samurai bonds -----> Yen-denominated foreign bonds sold in Japan Yankee bonds -----> Dollar-denominated foreign bonds originally sold to US investors Euroyen bonds -----> Yen-denominated foreign bonds sold outside Japan Eurodollar bonds -----> Dollar-denominated foreign bonds sold outside the U.S. Eurosterling bonds -----> Pound sterling-denominated foreign bonds sold outside the UK

Select all that apply Which statements are true of zero-coupon bonds? (Multiple select question) A. The realized compound return over the life of a zero-coupon bond can only be known at maturity. B. The yield to maturity of a zero coupon bond is the same as its holding period return over any holding period. C. The IRS treats their price appreciation as imputed taxable interest income to the investor. D. Prices of zero-coupon bonds rise exponentially over time.

C. The IRS treats their price appreciation as imputed taxable interest income to the investor. D. Prices of zero-coupon bonds rise exponentially over time.

Select all that apply When a bond matures, the issuer repays the debt by paying the bond's ______. (Multiple select question) A. present value B. future value C. face value D. par value

C. face value D. par value

True or false: Holding-period return is the rate of return over a particular investment period and depends on the market price of the bond at the end of that holding period; the price is known today

FALSE

True or false: Convexity refers to the curvature that reflects the fact that progressive increases in the interest rate results in progressively smaller reductions in the bond price.

TRUE

True or false: The yield to maturity differs from the current yield of a bond, which is the bond's annual coupon payment divided by its price.

TRUE