FIN 3100 Chapter 6 Review Questions Bonds and Bond Valuation. Your Welcome :)

When a bond cannot be called for a number of years after issue; this is a ........ call, and the bond is .............. during this period.

deferred; call protected

The value of a bond is dependent upon the:

coupon rate and the yield to maturity

A bond with 7.5 coupon rate has a yield to maturity of 8% 25 years to maturity a 1000 face value and pays interest semi annually. What is the amount of each coupon payment?

$37.50

A par value bond is a bond having the following features: 1. yield to maturity equals the coupon rate 2. market price lower that the face value 3. market price equal to the face value

1 and 3 only

Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S. 1. Registered form 2. Bearer form 3. Quarterly coupon payments 4. Semiannual coupon payments

1 and 4

Which of the following can generally be found in a bond's indenture agreement? 1. Terms of repayment 2. Names of registered shareholders 3. Protective covenants 4. Total amount of the bond issue

1,3,4

Waffles and More wants to raise $6.5 million by issuing 12-year, zero coupon bonds. The market requires a 9.3 percent return on similar bonds. The face value per bond will be $1000. How many bonds must the firm issue? Ignore all issue and transaction costs and assume semi-annual compounding.

19349 bonds

A bond with a 1000 face value is currently quoted as 98.42. The bond pays semi annually payments of $45 and matures in 6years. What is the coupon rate?

9 percent

A bond has a yield to maturity of 9.38%, a 7.5% annual coupon, a $1000 face value, and a maturity date 21years from today. What is the current yield?

9.04%

Which one of the following statements is true? a) The current yield on a par value bond will exceed the bond's yield to maturity. b) The yield to maturity on a premium bond exceeds the bond's coupon rate. c)The current yield on a premium bond is equal to the bond's coupon rate. d) A premium bond has a current yield that exceeds the bond's coupon rate. e) A discount bound has a coupon rate that is less than the bond's yield to maturity.

A discount bond has a coupon rate that is less than the bonds yield to maturity.

........... Is the right of the bond's issuer to repurchase the bond at a predetermined price prior to maturity. However, the ............. is the provision prohibiting the company from redeeming the bond prior to a certain date.

Call provision; Deferred call provision

A ............. allows the issuer to repurchase the bond debt prior to maturity. In most cases, the call price will be equal to the ............... of the bond plus a ..................

Call provision; face value; call premium

A bond that has the features of both debt and equity, and can be exchanged for shares of stock of the issuing firm is called

Convertible Bond

A bond coupon payments are calculated based on the ................ when the bond is issued. However, bond valuation requires that we determine the ......... which is the market required rate of return on that bond at the time of the valuation.

Coupon rate; yield to maturity

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

Debenture

Which one of the following terms denotes for certain that a bond is unsecured?

Debenture

The bond-ratings of Moody's and Standard and Poor's are concerned only withe the possibility of.......: these bond ratings do not address the volatility of the bond price due to ................

Default; Interest rate risk

Bonds are rated according to the likelihood of ..........; high ratings indicate.............. probability of default.

Default; Low

A bond selling for less that the face value is a ...........; and a bond with the yield to maturity higher that the coupon rate is a ...................

Discount Bond; Discount Bond

A bond that was previously rated as investment grade but has been downgraded to a junk bond status is called a:

Fallen Angel

A premium bond is a bond that:

Has a market value greater than the par value

The coupon payments of a........ bond are paid only when the firm's income is sufficient to do so. A ............... Bond can be swapped (exchanged) for a fixed number of stocks.

Income; Convertible

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

Indenture

Which one of the following statements is correct regarding mortgage backed securities (MBSs)?

Investors in MBSs are subject to real estate deflation risk

A ............... Bond is a bond that pays fixed coupon payments ate regular period of time. A .............. bond is a bond that is sold at a deep discount and it makes only one payment at maturity.

Level coupon; Zero coupon

Which one of the following might be included in a bond's list of negative protective covenants?

Limiting cash dividend to $1 per share or less

A ............. is an undecured debt that generally matures in less that ten years; a .......... is an unsecured debt that gerneally matures in ten years or more.

Note; Debenture

Municipal bonds:

Pay interest that is federally tax exempt

When the yield to maturity is lower than the coupon rate, the bond should be:

Premium Bond

The value of a bond equals to the sum of the ............ of both the future............. and the ...............

Present value; coupon payments; face value

The primary purpose of protective covenants is to help:

Protect bondholders from issuer actions.

A .................. restricts actions of the bond issuer. A ................restricts the issuer actions, where as a ................. requires that certain actions be taken by the corporation.

Protective covenant; Negative covenant; Positive covenant

A bond that gives the bondholder the right to force the issuer to purchase the bond at a stated price is called:

Put Bond

The yield to maturity for a bond is the bond's ................ When the market value of the bond is equal to its face value, the yield to maturity should be equal to the .................

Rate of Return; Coupon Rate

If a bond is ............, the company's registrar mails the interest payment to the owner of record. However, ............ bonds have dated coupons attached to them; the bondholder has to detach a coupon and mail to the firm which then makes the interest payment.

Registered; Bearer

.................. Governs priority of payment to creditors in the event of bankruptcy. A debt is ......... when creditors must be repaid first.

Seniority; Subordinated

The account managed by the bond trustee for the purpose of the early bond redemption is the:

Sinking Fund

A................ bond have no default risk. A ................ bond carries some default risk and is exempt from federal income taxation.

Treasury; Municipal

Face Value and Par Value are Synonymous terms.

True

To determine the value of a bond a particular point in time we use the yield to maturity, which is the market interest rate at that time for bonds with similar features.

True

A ............. Bond makes no coupon payments, and is initially priced at a deep discount from par value. A..................bond has adjustable coupon payments, which are tied to a specific index.

Zero coupon; Level coupon

Generally speaking, bonds issued in the U.S. pay interest on a ........ basis

semi annual