BFIN Ch 6 SB

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.

A sukuk is a contract that is related to

riba. Islamic law

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

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 bid price?

It is the price an investor will receive if he or she sells a bond to a dealer. It is the price at which a dealer is willing to buy securities.

Equity represents a(n) ______ interest of a firm

Ownership

What are the cash flows involved in the purchase of a five-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 five years

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

Public and private issues

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 =

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.

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.

The U.S. government borrows money by issuing ______

Treasury notes Treasury bonds

True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price

True

True or false: The government sells Treasury notes and bonds to the public every month.

True

It is the duty of the bond _____ to manage the sinking fund so that bonds can be repaid

Trustee

Which of the following are bonds that have actually been issued?

a put bond a convertible bond a CoCo bond

Which of the following terms apply to a bond?

coupon rate par value time to maturity

The bid-ask spread represents the ____

dealer's profit

The nominal rate is found by adding the ______ and the real rate of return

inflation

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

Which one of the following is the most important source of risk from owning bonds

market interest rate fluctuations

The term structure of interest rates examines the _______

relationship between short-term and long-term interest rates

What are the three components that influence the Treasury yield curve?

the real rate of return expected future inflation the interest rate risk premium

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields

default risk premium liquidity premium

A key difference between interest payments and dividend payments is

dividends are not tax deductible. interest is tax deductible.

What is the purpose of a sinking fund?

to create a fund to repay bonds when they fall due

True or false: Long-term debt has maturities greater than one year

true

A Sukuk is in compliance with Islamic law as the financing instrument is not charging any ______ or making money from money

Interest

Which of the following are true of bonds?

They are issued by both corporations and governments. They are normally interest-only loans.

True or false: Current yield = Annual coupon payment/Price

True

Why is the bond market less transparent than the stock market? Multiple choice question.

Many bond transactions are negotiated privately.

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 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 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

The coupon payments on floating-rate bonds are _____.

Adjustable

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

Equity is publicly traded, while debt is not.

What is a real rate of return?

It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation.