FIN 357 Chapter 7

When the U.S. government wants to borrow money for the long-term (more than one year) it issues:

1. Treasury bonds 2. Treasury notes

True or false: Equity represents an ownership interest.

true

Why does a bond's value fluctuate over time?

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

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

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

issuing bonds

Which of the following institutions issue bonds that are traded in the bond market?

1. The federal government 2. Public corporations 3. State governments

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

1. Time remaining to maturity 2. Coupon rate 3. Par value 4. Applicable market rate

Which three of the following are common shapes for the term structure of interest rates?

1. Upward sloping 2. Downward sloping 3. Humped

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

1. YTM is the prevailing market interest rate for bonds with similar features. 2. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

A corporate bond's yield to maturity ____.

1. changes over time 2. can be greater than, equal to, or less than the bond's coupon rate

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%

In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.

2 to 30

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

the market price of the bonds

What is a bond's current yield?

Current yield = Annual coupon payment/Current price

What are the two major forms of long-term debt?

Public issue and privately placed

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

false

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

In general, a corporate bond's coupon rate ____,

is fixed until the bond matures

If the term structure of interest rates is upward sloping, then ____.

long-term rates are higher than short-term rates

There is a(n) ______ relationship between market interest rates and bond values.

negative

When the term structure of interest rates is downward sloping, ____.

short-term rates are higher than long-term rates

Which one of the following is the most important source of risk from owning bonds?

Market interest rate fluctuations

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

1. Remaining life of bond 2. Market yield 3. Coupon rate

The U.S. government borrows money by issuing:

1. Treasury bonds. 2. Treasury bill 3. Treasury notes.

A humped term structure of interest rates indicates that interest rates are expected to _____ as the time to maturity increases.

increase and then decline

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.

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

current

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

decrease