Chapter 6 questions test 2
The current yield on a bond is equal to
Annual coupon payment divided by bond price.
The interest payments to the bondholder are called
Coupons
A bond can also be called a.... OR.....
Debenture Note
Bonds are defined as
Debt Securities
The additional yield on a bond that investors require for bearing default risk is known as
Default Premium
The risk that a bond issuer may not pay on its bonds in known as
Default Risk.
A bond that is priced below its face value is said to sell for a
Discount.
A change in interest rate has the greatest effect on the present value of:
Distant Cash Flows
When the interest rate is lower than the coupon rate on a bond, the price of the bond will be:
Higher than face value.
When the interest rate is higher than a bond's coupon rate, the bond will be priced at:
Less than Face Value
A bond that is priced above its face value is said to sell for a
Premium.
The total income per period per dollar invested is known as the
Rate of Return.
The difference between the bid price and the asked price of a bond is the
Spread.
A measure of return that takes account of both coupon payments and change in a bond's value over its life is a standard measure known as
Yield to Maturity.
The discount rate that makes the present value of the bond's payments equal to its price is known as the
Yield to Maturity.
The Yield to maturity assumes the bond is ....
held to Maturity.
The payment made when a bond matures is called the bond's
Face Value
When the coupon rate of a bond is equal to the current interest rate, the bond will sell for
Face Value.
The ...... measures the return to investors if they buy a bond at the asked price and hold it to maturity.
Asked Yield to Maturity
Governments and corporations borrow money by selling.... to investors.
Bonds
The price of a bond is equal to the PV(Coupon) plus
PV(Face Value)
The price of a bond can be quoted as a ........ of face value.
Percentage
What is the term used in finance to represent simple, standard, and common?
Plain Vanilla
An individual invested $1,000 in a bond with a coupon payment of $12. The price of the bond increased to $1,400. What is the rate of return on this bond?
Rate of return=(coupon income + price change)/investment= ($12+$400)/$1,000=.412 or 41.2%
....... is the annual interest payment on a bond, expressed as a percentage of face value.
The Coupon Rate
Bonds rated Baa or above by Moody's or BBB or above by Standard & Poors are known as
investment Grade Bonds.
If the bond's yield to maturity remains unchanged during the period, the bond price changes with time so that the total return on the bond.... the yield to maturity.
is Equal to