Frl 3000 Connect Chapter 7 study set

the interest from a municipal bond is exempt from _____ income taxes.

federal

as maturity of a bond increases, interest rate risk

increases at a decreasing rate

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

is fixed until the bond matures

What is the real rate of return?

is the rate of return that has been adjusted for inflation.

How is investing in the U.S. Treasury bonds differnt from investing in corporate bonds?

-Interest from U.S. Treasuries is expempt from taxes at the state level but corporate interest is not. -Treasury issues have no default risk.

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

true

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 is included in the calculation of a bond's yield to matturity?

-Par value -Current price -Coupon rate

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, amd a coupon interest payment of $100 per year?

10%

what is the likely impact on all interest rates when the real rates are high?

it will increase

assume you own a bond that was issues by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?

the bond value will fall

you own two bonds----one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?

the bond with the 5% coupon rate is more sensitive

What is the bid price?

the price a dealer is willing to buy for a security

how much can a corporation expect to receive per bond if it sells 10-year zero coupon bonds with a face value of $1,000 if the market rate of interest is 9 percent? Assume that the interest on bond compounds semiannually.

$414.64

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What ill the par value of the bonds be in year 5?

$5,000 per bond

what is the real rate of return if the nominal rate is 7 percent and the rate of inflation is 2 percent?

4.90%

When the US government wants to barrow money for the long-term (more than one year) it issues:

-Treasury notes -Treasury bonds

what are the three components of the treasury yield curve?

real rate of return expected inflation interest rate risk premium

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

All else held constant, the yield on a highly liquid bond will be ______ the yield on an illiquid bond.

lower than

If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the _____ rate.

real

The amount by which the call price exceeds the par value of the bond is called

the call premium

Why does a bond's value flucuate over time?

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

What is the clean price of a $1,000 par value bond with a 12 percent coupon, payable semiannually, if the bond's dirty price is $1,050 and the next semiannual coupon pay is due in 4 months?

$1,030

A corporation issues $50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7 percent. What will be the total annual interest expense for the corporation?

$3.5 million

suppose depp corporation issues a $1000 par value zero coupon bond with ten years to maturity and a YTM of 5%. What is the imputed interest in the third year of the bond? For calculation, assume semiannual period.

$34.10

Assume a bond has a $1,000 par value, a coupon rate of 6 percent, annual interest payments, and 7 years to maturity. If the yield on similar bonds is 8 percent, what is the current market value of this bond?

$895.87

what is the price of a U.S. treasury bond that is listed at 90 if the par value is $1,000?

$900

Which one of these correctly specifies the relationship between the nominal rate and the real rate?

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

Which of the following is true about interest rate risk?

- all else equal, the longer the time to maturity, the greater the interest rate risk -all else equal, the lower the coupon rate, the greater the interest rate risk.

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

-Applicable market rate -Coupon rate -Par value -Time remaining to maturity

What are the three components of the nominal rate of return?

-Compensation for the inflation effect on the original investment -compensation for the inflation effect on the investment earnings - real rate of return

Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?

-The asked price -The bid price

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

-The federal government -Public corporations -State governements

Which of the following are features of municipal bonds?

-The interest on municipal bonds is exempt from federal taxes -They are issued by state and local governments

A corporate bond's yield to maturity _______.

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

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

-interest rate risk premium -inflation premium -real interest rate

All junk bonds typically have which of these features?

-less than investment-grade rating -high probability of default

Which of the following are common protective covenants?

-the firm must limit dividends to equity holders -a firm cannot merge with any other firm -the firm must maintain working capital at or above a specified level

Which of the following are usually included in a bond's indenture?

-the repayment arrangements -the total amount of bonds issued

What are some reasons why the bond market is so big?

-various state and local governments also participate in the bond market -many corporations have multiple bond issues outstanding -federal government borrowing activity in the bond market is enormous.

How significant is the inflation premium on the shape of the term structure of interest rates? (Select all that apply)

-very significant -More significant than the real rate of return

How is a zero coupon bond different from a convential bond?

-zero coupon bonds are always issued at a discount -zero coupon bonds make no interest payments

Place the following bonds in order of security as defined in the US.

1) Mortgage bonds 2)Debentures

If an investment appreciates by 7 percent while the rate of inflation is 2 percent, what is the nominal rate of return?

7%

If that rate of inflation is 3 percent and the real rate of return is 5 percent, the nominal rate is approximately ____ percent.

8

Which of the following spreadsheet functions can be used to calculate the YTM on a bond paying 5% annual coupons with $1,000 par value if the bond costs $943.82? The bond was purchased on 1/1/2015 and matures on 1/1/2030.

=YIELD(1/1/2015,1/1/2030,0.05,94.382,100,1)

What is a premium bond?

A bond that sells for more than face value.

how has TRACE improved transparency in the corporate bond market?

Corporate bond dealers are now required to report trade info through TRACE

A firm's bond rating sheds light on its ______ risk.

Default

How is an APR computed?

Rate per period X number of periods per year

The term structure of interest rates examines the _______.

Relationship between short-term and long-term interest rates

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bonds price will be more sensitive to interest rate risk?

The 10 year bond

What is the asked price?

The asked price is the price at which a dealer is willing to sell.

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

The market price of the bonds

How is the real rate of return different from the nominal rate of return?

The real rate of return is adjusted for the effect of inflation whereas nominal rate is not adjsuted for thte effect of inflation

What information is needed to compute a bond's yield-to-maturity?

Time to maturity coupon rate the bonds current price

What information is needed to compute a bond's yield-to-maturity?

Time to maturity, the bond's current price, coupon rate

why did Disney issue 100-year bonds. dubbed "sleeping beauty" bonds, on the 1990s?

To lock-in historically low interest rates for a long time

A treasury yield curve depicts the _____.

Yields for different maturities of Treasury securities.

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

at 99.5% of face value plus any accrued interest

What are original issue discount bonds?

bonds that are issued with a very low coupon rate

in general, which will have a higher pretax yield? (assume the bonds are comparable)

corporate bond

the bid-ask spread represents the ______.

dealers profit

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

downwawrd sloping upward sloping humped

A bond with a BBB rating has a ___ than a bond with an A rating.

higher risk of default

assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will ______.

increase

A bond's yield to maturity considers the interest earning and the change in the bond's price while the current yield considers____.

interest earnings only

what six factors determine the yield on a bond?

liquidity, expected future inflation, real rate of return, interest rate risk, default risk, and taxability

The reason that interest rate risk is greater for ____ term bonds than for _____term bonds is the change in rates has a greater effect on the present value of the _____ than on the present value of the ____.

long; short; face value; coupon value

the interest rate risk premium is the additional compensation demanded by investors for holding ______bonds.

longer term

True/False: The inflation premium will be higher if the rate of inflation is low.

low

the rates of financial securities are generally quoted as:

nominal rates

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

public issue and privately placed

A sinking fun is one type of;

repayment provision

in case of default

subordinated debt holders must give preference to other specified creditors

the taxability premium is the additional compensation demanded on _______.

taxable bonds

suppose you own a 30-year bond issued by GE and a 2- year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?

the GE bond will lose more because it has a longer maturity.

which is the largest security market in the world in terms of trading volume?

the U.S. treasury market

what is the difference between a bonds "clean price" and the its "dirty price"?

the clean price excludes interest accrued since the last coupon payment, while the dirty price includes accrued interest.

Why is the YTM of a discount bond greater than the bond's current yield?

the current yield does not include the capital gain from the price discount from face value

Which is more transparent, the stock market or the bond market?

the stock market is more transparent

True/False: The major differences between Western Financial practices and Islamic law is that Islamic law does not permit charging or paying interest.

true

If you invest in a corporate bond, how many times can you expect, in general, to receive interest?

twice a year

most of the time, a floating-rate bonds coupon adjusts _____.

with a lag to some base rate

what will the impact be on your risk exposure if your bond has recently been categorized as a "fallen angel"?

your risk will increase

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

Market yield Coupon rate Remaining life of bond

The default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might_____.

Not make all the promised payments

what are the federal income tax implications of receiving $50 an interest income from a municipal bond versus a corporate bond?

Only the interest on the corporate bond will be taxed.

What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 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

What is the effective yield for a bond that pays interest semiannually and has a quoted yield to maturity of 10 percent?

10.25% [1+(.10/2)]^2-1

At what tax rate will you be indifferent between a muni that yields 7 percent and a comparable corporate bond yielding 9 percent? Assume no state taxes.

1-.07/.09= 22.2%

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

True

True or false: In general, the stock market is more transparent than the real estate market.

True

Which of the following terms apply to a bond?

-Coupon rate -Par value -Time to maturity

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

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

What are three important features of Treasury notes and bonds?

-taxable -highly liquid -default-free

What is the current yield on a $1,000 par value bond that sells for $900 if the coupon rate is 10 percent?

11.11%

Use your calculator to find the YTM on a 20 year, $1,000 par value bond that pays coupons of 4.5% semi-annually and currently sells for %1104.89.

3.75%

If you are in the 15 percent federal tax bracket, what will be your aftertax yield on the U.S. Treasury bond that is currently priced at par and yield 5 percent?

4.25%

If you are in the 20 percent tax bracket, what is your aftertax yield on a par value municipal bond yielding 5 percent? Ignore state and local taxes.

5%

What will your aftertax yield be on a corporate bond that is currently priced to yield 7% if you are in the 25 percent tax braket?

5.25%

Drag statements on the right to match the left

CAT bond protects insurance companies from natural disasters convertible bond can be exchanged for shares of stock put bond owner can force issuer to repay prior to maturity at a stated price structured note based on financial securities commodities or currencies

What is discount bond?

Discount bonds are bonds that sell for less than the face value

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

Treu/False: If you invest in junk bonds, there is a high likelihood that you will earn a very high return.

False

What are the sources of information for generating bond ratings?

Information from the corporation being rated, and information collected by the bond rating agency

Which of the following is true about a multi-year typical bond's coupon?

It is a fixed annuity payment

What is the definition of a bond's time to maturity?

It is the number of years until the face value is due to be repaid

A bond has a quoted price of $984.63, a face value of $1,000, a semi annual coupon of $20, and a maturity of 10 years. Match its current yeild and its YTM below.

YTM=4.19% Cuurent yeild=4.06%

if a bond is rated Baa by Moody's and BB by the Standard & Poor's the bond will be regarded as a(n)____ bond.

crossover

As a general rule, which of the following are true about debt and equity?

equity represents an ownership interest the maximum reward for owning debt is fixed

if a bond is selling at a discount from its par value. the YTM must be ______the coupon rate.

greater than

What is the defnition of a bond's time to maturity?

It is the number of years until the face value is due to be repaid

What is the nominal rate of return on an investment?

It is the rate that has not been adjusted for inflation.

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations

Which of these correctly identify differences 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 any tax benefits to investors but corporate bonds do.