Chapter 6: Valuing Bonds

Which of the following sell bonds? -state and local governments -individuals and households -U.S. Treasury -Corporations

-State and Local Governments -U.S. Treasury -Corporations

A bond can also be called a: -debenture -share -leased asset -note

-debenture -note

Marley Corporation's bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the yield to maturity is _____. (Use trial and error to calculate yield).

10% 1) coupon pmts = 1,000*.05=$50 2) trial and error: FV = 1,000 PMT = 50 N = 4 I/Y = 5/8/10/12 PV = must equal 841.51

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?

41.2% 1)ROR = (coupon income + price change) / investment = (12+400)/1000 = 41.2%

A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current interest rate of 6%. The bond will sell for

5,000 1) bond rate = interest rate so it sells at facevalue

Mortor's Corporation sold 6 year bonds for $1,072.62, with a face value of $1,000 and a coupon rate of 8%. The annual yield to maturity is:

6.5% 1) N = 6 PV = 1,072.62 PMT = 80 FV = 1,000 I/Y = ?

The price of a bond is equal to the

PV(coupon) plus PV(face value)

The total income per period per dollar invested is known as the:

Rate of Return

A bond that is priced below its face value is said to sell for

a discount

A bond that is priced above its face value is said to sell for

a premium

The current yield on a bond is equal to:

annual coupon payment divided by bond price

Governments and corporations borrow money by selling _______ to investors.

bonds

The interest payments to the bondholder are called the

coupon

A bond's _______ is fixed, but the present value is affected by changes in the ________.

coupon payment; interest rate

The _______ is the annual interest payment on a bond, expressed as a percentage of face value.

coupon rate

Bonds are defined as:

debt securities

A change in interest rate has the greatest effect on the present value of:

distant cash flows

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 is _____ the yield to maturity.

equal to

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

When interest rates rise, bond prices:

fall

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 lower than the coupon rate on a bond, the price of the bond will be:

higher than face value

The __________ on government bonds provide a benchmark for all interest rates.

interest rates

If interest rates rise, the rate of return on a bond will be _____ the yield to maturity.

less than

The price of a bond can be quoted as a _____ of face value.

percentage

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

For bonds priced at face value, the rate of return is

the coupon rate

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 purchaser of a bond pays the ______ price, whereas the investor who already owns the bond and sells it receives the ________ price.

asked; bid