FIN 300 Test 2

II and III only

Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years

I and IV only

Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate

Default Risk

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer

call premium

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following?

The yield-to-maturity is less than the coupon rate.

A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?

maturity

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

for 100 and 11/32nds percent of face value.

A U.S. Treasury bond that is quoted at 100:11 is selling:

clean price

A bond is quoted at a price of $989. This price is referred to as which one of the following?

callable

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

bearer form.

A bond that is payable to whomever has physical possession of the bond is said to be in:

The reported bond price is: 100 5/32 percent of par = $1,001.5625 15 days have passed since the last semiannual coupon was paid, so there is an accrued interest, which can be calculated as: Accrued Interest = Annual Coupon Payment × Days since Last Coupon Payment 2 Days Separating Coupon Payment = $40 × (15/182) = $3.2967 The invoice price is the reported price plus accrued interest: $1,001.5625 + $3.2967 = $1,004.8592 = $1,004.86

A bond with a coupon rate of 8% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100:05. What is the invoice price of the bond? The coupon period has 182 days

Current yield = Annual coupon = $1,000 × 4.2% = 4.35% Bond price $965

A bond with an annual coupon rate of 4.2% sells for $965. What is the bond's current yield?

7.48 Current price = $1,000 - 77.50 = $922.50, so current yield = $69/$922.50 = 7.48%

A coupon bond that pays interest of $69 annually has a par value of $1,000, matures in 5 years, and is selling today at a $77.50 discount from par value. The current yield on this bond is _________.

Invoice price = 1.07(1,000) + 25.00(3/6) = 1,082.50

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 107% of its $1,000 par value. If the last interest payment was made 3 months ago and the coupon rate is 5.00%, the invoice price of the bond will be _________.

early bond redemption

A sinking fund is managed by a trustee for which one of the following purposes?

A discount; less than

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

the legal agreement between the bond issuer and the bondholders.

An indenture is:

The after-tax yield on the corporate bonds is: 0.0975 × (1 - 0.35) = 0.0634 or 6.34%. Therefore, the municipals must offer at least 6.34% yields.

An investor is in a 35% combined federal plus state tax bracket. If corporate bonds offer 9.75% yields, what must municipals offer for the investor to prefer them to corporate bonds?

in registered form.

Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

are considered to be free of default risk

Bonds issued by the U.S. government:

BBB

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

6.56 n= 13(2) %= 9.2/2

Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate?

yield to maturity

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

nominal rates.

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

12.00

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?

dirty price.

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:

inflation

Real rates are defined as nominal rates that have been adjusted for which of the following?

37 on practice

See number 37 and 38 on practice

10.04 Calc. n= 15(2) pmt=103/2

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. These bonds currently sell for 102 percent of par value. What is the yield-to-maturity?

9.52

Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity. The bond makes annual payments and currently sells for $842.10. What is the yield-to-maturity?

decrease the market price

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?

the price at which the dealer in Treasury bills is willing to buy the bill

The bid price of a Treasury bill is _________.

junk bonds

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.

the lack of an active market wherein a bond can be sold for its actual value.

The liquidity premium is compensation to investors for:

5.47 (1+R)=(1+r)(1+h)

The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.4 percent. The current rate of inflation is 2.0 percent. What is the nominal rate of return on these bonds?

1,023.75 p= (102 + 12/32)(1000/100)

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

term structure of interest rates.

The pure time value of money is known as the:

7,057

You have won a contest and will receive $2,500 a year in real terms for the next 3 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 3.1 percent. What are your winnings worth today?

Accrued interest = (0.075 × $1,000) × (3/12) = $18.75 Clean price = $1,460 - $18.75 = $1,441.25

You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 7.5 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond?

Protective covenants:

are primarily designed to protect bondholders.

Callable bonds generally:

have a sinking fund provision.