Finance SmartBook Ch 6
A sukuk is a contract related to:
- Islamic law - riba
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
The coupon payments on floating-rate bonds are _____________.
adjustable
If bonds for AT&T are quoted at 115, they can be purchased:
at 115 percent of par value plus accrued interest
As an investor in the bond market, why should you be concerned about changed in interest rates?
changes in interest rates causes changes in bond prices
A bond with a BB rating has a __________ than a bond with a BBB rating.
higher risk of defualt
What is the most important source of risk from owning bonds?
market interest rate fluctuations
What are the two major forms of long-term debt?
private and public issue
The term structure of interest rates examine the ______________________.
relationship between short-term and long-term interest rates
If a bond is issued with a call provision, it allows the issuer to _________________ part or all of the bond at defined prices and times.
repurchase
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
What does a bond's rating reflect?
the ability of the firm to repay its debt and interest on time
Bond ratings are based on the probability of default risk, which is the risk that __________________.
the bond's issuer may not be able to make all the required payments
What does the AAA rating assigned by S&P mean?
the firm is in a strong position to meet its debt obligations
What are some features of the OTC market for bonds?
- OTC dealers are connected electronically - the OTC has no designated physical location
What is a corporate bond's yield to maturity (YTM)?
- YTM is the prevailing market interest rate for bonds with similar features - YTM is the expected return for an investor who buys the bond today and holds it to maturity
What are some bonds that have actually been issued?
- a put bond - a convertible bond - a CoCo bond
A corporate bond's YTM...
- changes over time - is usually not the same as a bond's coupon rate
What terms apply to a bond?
- coupon rate - par value - time to maturity
A key difference between interest payments and dividend payments is:
- interest is tax deductible - dividends are not tax deductible
What is the asked price?
- it is the price at which an investor can buy a particular security from a dealer - is is the price at which a dealer is willing to sell a particular security
What is the real rate of return?
- it's a percentage change in buying power - it's a ROR that has been adjusted for inflation
What is the bid price?
- it's the price at which the dealer is willing to buy securities - it's the price an investor will receive if he or she sells a bond to a dealer
As a general rule, what is true of debt and equity?
- the maximum reward for owning debt is fixed - equity represents an ownership interest
What are the 3 components that influence the Treasury yield curve?
- the real rate of return - the interest rate risk premium - expected future inflation
The term structure of interest rates describe:
- the relationship between nominal rates and time to maturity - the pure time value of money
What is true of bonds?
- they are issued by both corporations and governments - they are normally interest-only loans
If a $1,000 face value US Treasury bond is quoted at 99.5, then the bond can be purchased __________________.
at 99.5 % face value plus any accrued interest
If a bond is issued with a __________________ provision it allows the issuer to repurchase part or all of the bond at defined prices and times.
call
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 bid-ask spread represents the _______________.
dealer's profit
When interest rates in the market rise, we can expect the price of bonds to _______________.
decrease
What is NOT a different between debt and equity?
equity is publicly traded, while debt is not
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows _______________.
increases
The degree of interest rate risk depends on _________________.
the sensitivity of the bond's price to interest rate changes
What is the purpose of a sinking fund?
to create a fund to repay bonds when they fall due
The US Gov't borrows money by issuing _______________.
treasury notes and bonds
It is true of the bond _____________ to manage the sinking fund so that bonds can be repaid.
trustee
Most of the time, a floating-rate bond's coupon adjusts ________________.
with a lag to some base rate
What is a bond's current yield?
Current Yield = Annual Coupon Pmt/Price
A put bond allows the holder to force the issuer to buy the bond back at a stated price. T/F
True
Long-term debt has maturities greater than one year. T/F
True
The Gov't sells treasury notes and bonds to the public every month. T/F
True
A Sukuk is in compliance with Islamic law as the financing instrument is not charging any _______________ or making money from money.
interest
What does a Treasury yield curve show?
it shows the yield for different maturities of Treasury notes and bonds
What is the nominal rate of return on an investment?
it's the actual percentage change in the dollar value of an investment unadjusted for inflation
A zero coupon bond is a bond that ______________.
makes no interest payments
Why is the bond market less transparent than the stock market?
many bond negotiations are negotiated privately
Equity represents a(n) __________________ interest of a firm.
ownership
