FIN 201 Chapter 7 Assignment

How is investing in U.S. Treasury bonds different from investing in corporate bonds?

Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not. Treasury issues have no default risk.

If a $1,000 par value bond is trading at a premium, the bond is _____.

trading for more than $1,000 in the market

True or false: Equity represents an ownership interest.

true

If the market rate of interest rises, the value of the bond will (fall/rise).

fall

If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.

greater than

How is an APR computed?

Rate per period × Number of periods per year

A is an unsecured bond, for which no specific pledge of property is made.

debentures

If the market rate of interest (increases/declines), bond values increase.

declines

When interest rates in the market rise, we can expect the price of bonds to ____.

decrease

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?

$5,000 per bond

A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed?

$50/$1,000

Which of these is included in the calculation of a bond's yield to maturity?

- Coupon rate - Current price - Par value

What is a premium bond?

A bond that sells for more than face value

What is a bond's current yield?

Current yield = Annual coupon payment/Current price

What is the definition of a bond's time to maturity?

It is the number of years until the face value is due to be repaid.

is the term that indicates preference in position over other lenders.

Seniority

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?

The 10-year bond

Why does a bond's value fluctuate over time?

The coupon rate and par value are fixed, while market interest rates change.

Why is the YTM of a discount bond greater than the bond's current yield?

The current yield does not include the capital gain from the price discount.

Why did Disney issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?

To lock-in historically low interest rates for a long time

If you invest in a corporate bond, how many times can you expect, in general, to receive interest?

Twice a year

A bond's YTM will exceed its current yield when the bond is selling at ____.

a discount

Bond yields (are/aren't) quoted like APRs.

are

When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called .

bonds

The amount by which the call price exceeds the par value of the bond is called the _____.

call premium

Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will _____.

increase

When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows ____.

increases

As the maturity of a bond increases, interest rate risk ____.

increases at a decreasing rate

The written agreement between the corporation and the lender detailing the terms of the debt issue is the

indenture

When comparing a 1-year bond's price to a 30-year bond's price, the 1-year bond's price is relatively (sensitive/insensitive) to interest rate changes.

insensitive

The federal government can raise money from financial markets to finance its deficits by ___.

issuing bonds

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.

less than

A company may decide to issue bonds with maturities of greater than 30 years in order to lock in (low/high) interest rates for a long time.

low

All other things being equal, the (lower/higher) the coupon rate, the greater the interest rate risk

lower

A sinking fund is one type of:

repayment provision

If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.

the market price of the bonds

The degree of interest rate risk depends on ____.

the sensitivity of the bond's price to interest rate changes

What information is needed to compute a bond's yield-to-maturity?

- Coupon rate - The bond's current price - Time to maturity

What is a discount bond?

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

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

Which of the following is true about a typical multiple-year bond's coupon?

It is a fixed annuity payment.

Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?

The GE bond will lose more because it has a longer maturity.

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.

You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?

The bond with the 5 percent coupon rate is more sensitive.

Which of the following variables are required to calculate the value of a bond?

- Market yield - Remaining life of bond - Coupon rate

As a general rule, which of the following are true of debt and equity?

- The maximum reward for owning debt is fixed - Equity represents an ownership interest

If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ____.

$1,220

What is a corporate bond's yield to maturity (YTM)?

- YTM is the prevailing market interest rate for bonds with similar features. - YTM is the expected return for an investor who buys the bond today and holds it to maturity.

Which of the following terms apply to a bond?

-coupon rate -time to maturity -par value

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?

10%

The yield is the bond's annual coupon divided by its price.

current

A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.

interest earnings only

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent.

lower than

A bond's time to is the number of years until the face value is due to be repaid.

maturity

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause changes in bond prices.

What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?

$950

Which of the following is true about interest rate risk?

- All else equal, the lower the coupon rate, the greater the interest rate risk. - All else equal, the longer the time to maturity, the greater the interest rate risk.

Which of these are required to calculate the current value of a bond?

- Coupon rate - Time remaining to maturity - Applicable market rate - Par value

Which of the following are true about a bond's face value?

- It is also known as the par value. - It is the principal amount repaid at maturity.

Which of the following are usually included in a bond's indenture?

- The repayment arrangements - The total amount of bonds issued

A corporate bond's yield to maturity ____.

- can be greater than, equal to, or less than the bond's coupon rate - changes over time

The main reason it is important to distinguish between debt and equity is that the benefits and risks _____.

are different

A bond's rate is the stated interest payment made on a bond.

coupon

The yield does not include the capital gain from the price discount, whereas the YTM does include it.

current

As the maturity of a bond increases, interest rate risk increases at a(n) (decreasing/increasing) rate.

decreasing

True or false: A bond's value is not affected by changes in the market rate of interest.

false

The longer the term, the (smaller/greater) the interest rate sensitivity.

greater

Most corporate bonds pay coupon interest payments times per year.

two

What is an interest-only loan?

It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.