Week 4
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
Which of the following are features of municipal bonds? Multiple select question.
1) The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue. 2) They are issued by state and local governments. 3) The interest on municipal bonds is exempt from federal taxes.
What is a corporate bond's yield to maturity (YTM)?
1) YTM is the prevailing market interest rate for bonds with similar features 2) YTM is the expected return for an investor who buys the bond today and holds it to maturity.
The term structure of interest rates describes ________.
1) the relationship between nominal rates and time to maturity 2) the pure time value of money
The bonds of a firm in financial distress may have a market value that is ______ than the face value at maturity
less
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.
Which of the following terms apply to a bond?
Coupon rate Time to maturity Par value
What is a bond's current yield?
Current yield = Annual coupon payment/Price
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
As a general rule, which of the following are true of debt and equity?
Equity represents an ownership interest. The maximum reward for owning debt is fixed.
True or false: Bond ratings are concerned only with the possibility of price changes.
False
Which of the following are true about a bond's face value?
It is also known as the par value. It is the principal amount repaid at maturity.
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 is the definition of a bond's time to maturity?
It is the number of years until the face value is paid off
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds
What will happen to a bond's time to maturity as the years go by?
It will decline
Which of the following variables is NOT required to calculate the value of a bond?
Original issue price of bond
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 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 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.
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
What are the two major forms of long-term debt?
public issue, private issue
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
What are the three components that influence the Treasury yield curve?
The real rate of return The interest rate risk premium Expected future inflation
Which of the following are usually included in a bond's indenture?
The repayment arrangements, The total amount of bonds issued
Which of the following are true of bonds?
They are normally interest-only loans They are issued by both corporations and governments
What four variables are required to calculate the value of a bond?
Time remaining to maturity Yield to maturity Coupon rate Par value
The US government borrows money by issuing:
Treasury notes, Treasury bonds
True or false: Long-term debt has maturities greater than one year.
True
True or false: The government sells Treasury notes and bonds to the public every month.
True
True or false: Current yield = Annual coupon payment/Price
Trues
Which of the following are bonds that have actually been issued?
a CoCo bond a convertible bond a put bond
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
The coupon payments on floating-rate bonds are __.
adjustable
A bond's ____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
coupon
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
A limitation of bond ratings is that they ____.
focus exclusively on default risk
A bond with a BB rating has a ______ than a bond with an BBB rating.
higher risk of default
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.
increases
The nominal rate is found by adding the _____ and the real rate of return.
inflation
A key difference between interest payments and dividend payments is?
interest is tax deductible dividends are not tax deductible
A corporate bond's yield to maturity:
is usually not the same as a bond's coupon rate, changes over time
A zero-coupon bond is a bond that ____.
makes no interest payments
Bonds issued by state and local governments are called _______ ______.
municipal bonds
Equity represents a(n) ____ interest of a firm.
ownership
A part of the indenture limiting certain actions during the term of the loan are termed ________.
protective covenants
The term structure of interest rates examines the ____.
relationship between short-term and long-term interest rates
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
