Finance 6b

The model that precisely specifies the relationship between the nominal rate and the real rate is: R = the nominal rate r = the real rate h = the rate of inflation

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

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?

- Liquidity premium - Default risk premium

What are some features of the OTC market for bonds?

- OTC dealers are connected electronically - The OTC has no designated physical location

Which of these correctly identify difference between U.S. Treasury bonds and corporate bonds?

- Treasury bonds are issued by the US government while corporate bonds are issued by corporations - Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk - Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer

The US government borrows money by issuing:

- Treasury notes - Treasury bonds

What are the two unique features of a U.S. federal government bond?

- U.S. Treasury issues are exempt from state income taxes. - U.S. Treasury issues are considered to be default-free

Which of the following are bonds that have actually been issued?

- a put bond - a CoCo bond - a convertible bond

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

- humped - downward sloping - upward sloping

Bonds issued by state and local governments are called ____ ____

- municipal bonds

If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes.

0%

If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.

5%

What are municipal bonds?

Bonds that have been issued by state or local governments

T/F: The dirty price does not include accrued interest.

False

What is a bond's accrued interest?

It is interest that has been earned but not yet received by the current bondholder

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

What does a Treasury yield curve show?

It shows the yield for different maturities of Treasury notes and bonds

Which of the following is true of zero coupon bonds?

No coupon payments are made on the bonds

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate

R = r + h

What does the clean price for a bond represent?

The quoted price excluding accrued interest

T/F: A put bond allows the holder to force the issuer to buy the bond back at a stated price.

True

T/F: In general, the price that is paid for a bond will exceed its quoted price.

True

T/F: Investors require a premium for the risk that issuers other then the Treasury may not make all promised payments on the issued bonds.

True

T/F: The government sells Treasury notes and bonds to the public every month.

True

When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?

Upward sloping

The coupon payments on floating-rate bonds are ___.

adjustable

The coupon payments on floating-rate bonds are ____.

adjustable

The bid-ask spread represents the ____.

dealer's profit

The ____ price is also called the "full" or "invoice" price.

dirty

The nominal rate is found by adding the ____ and the real rate of return.

inflation

What does the dirty price represent?

it includes the quoted price and accrued interest

The interest rate risk premium is the additional compensation demanded by investors for holding ___ bonds.

long-term

A zero-coupon bond is a bond that ____.

makes no interest payments

What does historical data suggest about the nature of short-term and long-term interest rates?

sometimes short-term rates are higher and sometimes long-term rates are higher

Most of the time, a floating-rate bond's coupon adjusts ___.

with a lag to some base rate

Why is the bond market less transparent than the stock market?

Many bond transactions are negotiated privately.

What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of %1000 if the current price is $800? Assume the market rate of interest is 5 percent.

Pay $800 today and receive $1,000 at the end of 5 years

The relationship between nominal rates, real rates and inflation is called ____.

the Fisher Effect

What are the three components that influence the Treasury yield curve?

- Expected future inflation - The real rate of return - The interest rate risk premium

T/F: The price you actually pay to purchase a bond will generally exceed the clean price

True

T/F: Zero bond calculations use semiannual periods to be consistent with coupon bond calculations.

True

T/F: Zero coupon bon calculations use semiannual periods to be consistent with coupon bond calculations.

True

T/F: in general, the price that is paid for a bond will exceed its quoted price.

True

If bonds for AT&T are quoted at 115, they can be purchased:

at 115% of par value plus accrued interest

If a $1,000 face value U.S Treasury bond is quoted at 99.5, then the bond can be purchased

at 99.5 percent of face value plus any accrued interest

Which three components determine the shape of the term structure of interest rates?

- Inflation premium - Real interest rate - Interest rate risk premium

When is a real rate of return?

- It is a rate of return that has been adjusted for inflation - It is a percentage change in buying power

What is the bid price?

- It is the price an investor will receive if he sells a bond to a dealer - It is the price at which a dealer is willing to buy securities

The term structure of interest rates describes ___.

- the relationship between nominal rates and time to maturity - the pure time value of money

The term structure of interest rates describes ____.

- the relationship between nominal rates and time to maturity - the pure time value of money

What is a real rate of return?

-it is a rate of return that has been adjusted for inflation -it is a percentage change in buying power