Intro to finance chapter 6
Which of the following are true about a bond s face value?
principal paid at maturity also known as par value
ABC Co. issued 1 million 6% annual coupon bonds that mature in 10 years. The face value is $1000 per bond. What are expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1000 repayment of principal at the end of 10 years
What does a bonds rating reflect?
The ability of the firm to repay its debt and interest in time
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not.
Assume a bond has a $1000 par value, a coupon rate of 6%, 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?
PV= (.06x1000) x (1-1/1.08^7)/.08 + 1000/1.08^7= 895.87
What is a corporate bond's yield to maturity (YTM)?
YTM is the expected return for an investor who buys the bond today and holds it to maturity YTM is the prevailing market interest rate for bonds with similar features
What is a bond's current yield?
Current yield= Annual coupon payment/Current price
Will increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?
Default risk premium Liquidity premium
The relationship between nominal rates, real rates and inflation is called:
Fisher effect
What is a bonds accrued interest?
It is interest that has been earned but not yet received by the current bondholder
What is a bid price?
It is the price at which a dealer is willing to buy securities It is the price an investor will receive if he sells a bond to a dealer
What is the asked price?
It is the price at which a dealer is willing to sell a particular security It is the price at which an investor can buy a particular security from a dealer
What will happen to a bonds time to maturity as the years go by?
It will decline
What is the real rate of return?
It is a rate of return that has been adjusted to remove inflation It is a percentage change in buying power
What is a nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation
What is the price of a U.S. Treasury bond that is listed 90 if the par value is $1000?
$900
What are some characteristics of the OTC market for bonds?
Connected electronically no designated physical location
What is a coupon rate on a bond that has a par value of $1000, a market value of $1100, and a coupon interest payment of $100 per year?
10%
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%
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.
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 %.
Pay $800 today and receive $1000 at the end of 5 years.
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
The term structure of interest rates examines the
relationship between short-term and long -term interest rates
Which of the following are features of municipal bonds?
The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue the interest on municipal bonds is exempt from federal taxes They are issued by state and local governments
As a general rule, which of the following are true of debt and equity?
The maximum reward for owning debt is fixed Equity represents an ownership interest
What does the clean price for a bond represent?
The quoted price excluding accrued interest
What are the three components that influence the treasury yield curve?
The real rate of return, expected inflation, and the interest rate risk premium
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayments of arrangements
Which of the following are true of bonds?
They are interest only loans They are issued by both corporations and governments
Junk bonds having the following features:
They are rated below investment grade bonds They have a high probability of default They pay a high rate of interest
Which of the following terms apply to a bond?
Time to maturity, par value., coupon rate
The US Government borrows money by using:
Treasury notes and bonds
Which of the following variables is not required to calculate the value of a bond?
original issue price of bond
When interest rates in the market rise, we can expect the price of bonds to:
decrease
Two unique features of a US Federal government bond?
exempt from state income taxes default free
Which three of the following are common shapes for the term structure of interest rates?
humped, upward sloping, downward sloping
A corporate bonds yield to maturity:
is usually not the same as a bonds coupon rate changes over time
Nominal rate =
real rate plus inflation rate
The term structure of interest rates describes:
the relationship between nominal rates and time to maturity the pure time value of money
The sensitivity of a bonds price to interest rate changes is dependent on which of the following two variables?
time to maturity coupon rate