Finance Exam 2 Luo
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
When interest rates go up, bond prices go up, When interest rates go up, bond prices fall.
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
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.
notes; bonds; bills
What is the EAR if the APR is 5% and compounding is quarterly?
Slightly above 5.09%
The most common shape for a yield curve is upward sloping.
True
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
Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.
829.73
The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?
$849.54
On March 1st, 2016, Thompson Warehouses Inc. issued twenty-five-year coupon bonds with a 10% coupon rate and $1,000 face value each. The first coupon date is 1-Sep-2016 and the second is made on 1-Mar-2017. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12% on September 1st, 2020. Given this information, what is the current price for a Thompson bond?
848.62
In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.
False, In constructing a yield curve you place interest rates on the vertical axis, and TIME TO MATURITY on the horizontal axis.
Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is
The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.08) × ($1,000) = $80.
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
The bank is technically renting money from you with a promise to repay that money with interest.
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
The bonds are selling at a premium to the par value, The bond market currently requires a rate (yield) less than the coupon rate, The coupon rate is greater than the yield to maturity.
Which of the statements below is FALSE?
The prices of goods and services tend to decrease over time because of inflation.
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
The Fisher Effect involves which of the items below?
Nominal rate, the real rate, and inflation
"Junk" bonds are a street name for ________ grade bonds.
speculative
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.
fixed-income
Which of the statements below is TRUE?
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.
Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving?
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.
Which of the following statements is FALSE?
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
Which of the following are issued with the shortest time to maturity?
Treasury bills
A basis point is ________.
one-hundredth of a percentage point
Which of the below is NOT a major component of interest rates?
Historical interest rates
The Fisher Effect states the relationship between the nominal rate (r), the real rate (r*), and inflation (h). Suppose r*= 5% and h = 4%. What is the precise value of the nominal rate (%) ?
9.2
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
The ________ is the face value of the bond.
par value
A T-Bill with a face value of $100 that will mature in one year is sold at $96 today. If you deposit $100 in a saving account, you will get $110 in three years. Calculate the term spread (%) between 3-year and 1-year rates (Is there a yield curve inversion?).
-0.96
You pay 20% down on a home with a purchase price of $180,000. Your bank will loan the remaining balance at 7% APR. You have an option to make annual payments or monthly payments on the loan. Both options have a 30-year payment schedule. What is the difference between the annuity payment paid under the annual plan and that under the monthly plan?
107.96
Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year?
1082.43
The ________ is a market derived interest rate used to discount the future cash flows of the bond.
yield to maturity
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
Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?
6.54%
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
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?
11439.46
You invest $25,000 at an annual rate of 7.25% for one year. What is the difference in interest earned if you compound this money on a daily basis instead of an annual basis?
67.13
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
Suppose the market is efficient and there is no risk. Five years ago, the market interest rate was 10% and Simpson Warehouses Inc. issued twenty-five-year annual par value coupon bonds. Since then, the interest rates in general have risen. The price today for a Simpson bond is $850.61. If you use a buy-and-hold strategy, what is the expected return (%) on Simpson bonds today?
12
RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner (semiannual compounding)?
231.38
Lucy is tempted to buy 200 apples, with each one costing $2. However, she realizes that if she saves the money in a bank account she should be able to buy 240 apples. If the cost of the an apple increases by the rate of inflation, i.e. 8%, according to the Fisher equation, how much would the nominal rate (%) of the return on the bank account have to be?
28