Fin exam 2

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

long-term debt

The ________ is the expiration date of the bond

maturity date

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

yield to maturity

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

Notes, Bond, Bills

The ________ is the face value of the bond.

Par value

What is the EAR if the APR is 5% and compounding is quarterly?

Slightly above 5.09% Using the EAR formula, we get 5.0945%, or slightly above 5.09%.EAR = [(1 + APR/m)m] -1 = [(1 + .05/4)4] - 1 = 5.0945%.

The most common shape for a yield curve is upward sloping. T/F

TRUE

The Fisher Effect involves which of the items below? a) Nominal rate, the bond rate, and inflation b) Nominal rate and inflation only c) Nominal rate and the real rate only d) Nominal rate, the real rate, and inflation

d) Nominal rate, the real rate, and inflation

Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? a) A bond selling at a discount means that the coupon rate is less than the yield to maturity. b) When the yield to maturity and coupon rate are the same, the bond is called a par value bond. c) A bond selling at a premium means that the coupon rate is greater than the yield to maturity. d) When interest rates go up, bond prices go up.

d) When interest rates go up, bond prices go up. When interest rates go up, bond prices fall.

Which of the below is NOT a major component of interest rates? Real rate Historical interest rates Default premium Inflation premium

historical interest rates

Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?

4% We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

Callable bond

The ________ is the regular interest payment of the bond

Coupon

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

Default premium

EAR formula

EAR = [(1 + APR/m)m] -1

In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis. T/F

FALSE In constructing a yield curve you place interest rates on the vertical axis, and TIME TO MATURITY on the horizontal axis.

Which of the following are issued with the shortest time to maturity?

Treasury bills

MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? a) All of the above are true. b) The coupon rate is greater than the yield to maturity. c) The bond market currently requires a rate (yield) less than the coupon rate. d) The bonds are selling at a premium to the par value.

a) all of the above

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

annual percentage rates

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

number of compounding periods per year

A basis point is ________.

one-hundredth of a percentage point

"Junk" bonds are a street name for ________ grade bonds.

speculative

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.

the credit rating increases, the default risk decreases, and the required rate of return decreases

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

yield to maturity

Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?

$1,082.43 With PV = $1,000, APR = 8.00%, C/Y = 4, periodic interest rate = r = 0.02, we begin by taking (1 + periodic rate) to the power of C/Y. Doing this gives: (1.02)4 = 1.08243. Multiplying this number by PV gives $1,082.43. Or using a financial calculator, Present Value = -1,000, PMT =0, Rate = 8, Periods = 4, Compounding = 4, solve for FV = $1,082.43.

You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule?

$11,439.96

The ________ is the interest rate printed on the bond.

Coupon rate

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

Coupon rate; Discount to

Which of the statements below is TRUE? a) The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. b)The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. c)The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. d) The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms.

The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. All other answers besides D have at least one word that disagrees with the correct words found in D.

Which of the statements below is FALSE? a) The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. b) The prices of goods and services tend to decrease over time because of inflation. c) The real interest rate is the reward for waiting. d) Nominal interest rates are the sum of two major components: the real interest rate and expected inflation.

b) The prices of goods and services tend to decrease over time because of inflation. Prices of goods and services tend to increase over time because of inflation.

Which of the following statements is FALSE? a) Although an APR is quoted on an annual basis, interest can be paid quarterly. b) The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. c) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. d) The APR can be referred to as a promised annual percentage rate.

c) Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. Interest CAN BE PAID DAILY (even though it may not be the common mode of payment).

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? a) The bank is lending money to you with a promise to repay that money with interest. b) The bank is lending money to you, but not borrowing money from you. c) The bank is technically renting money from you with a promise to repay that money with interest. D)The bank is borrowing money from you without a promise to repay that money with interest.

c) The bank is technically renting money from you with a promise to repay that money with interest.

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed-income

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.

you will be able to buy more goods or services