Chp 6 BA 323
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
Which of the following are true of bonds?
-They are issued by both corporations and governments -They are normally interest-only loans
Which of the following terms apply to a bond?
-coupon rate -time to maturity -par value
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?
They are issued by state and local governments. The interest on municipal bonds is exempt from federal taxes. The interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue.
The US government borrows money by issuing:
Treasury bonds, and treasury notes.
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: Investors require a premium for the risk that issuers other than the Treasury may not make all promised payments on the issued bonds.
True
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
What is a corporate bond's yield to maturity (YTM)?
YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.
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 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.
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond.
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.
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
Which of the following are bonds that have actually been issued?
a put bond a convertible bond a CoCo bond
The coupon payments on floating-rate bonds are ______
adjustable
To find the total bond value, add the present value of the amount paid at maturity to the ______ of the annual coupon payments.
annuity present value
If a bond is issued with a _____ provision it allows the issuer to repurchase part or all of the bond at defined prices and times.
call
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ______
call provision
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
What are the three components that influence the Treasury yield curve?
expected future inflation the real rate of return the interest rate risk premium
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 Sukuk is in compliance with Islamic law as the financing instrument is not charging any ____ or making money from money.
interest or riba
Indentures and loan agreements often contain protective covenants designed to protect the interests of ______
lenders
Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?
liquidity premium default risk premium
A zero coupon bond is a bond that ______.
makes no interest payments
Which of the following variables is not required to calculate the value of a bond?
original price of bond
Equity represents a(n) _____ interest of a firm.
ownership
A protective covenant is part of an indenture or loan agreement that limits certain actions a company may take during the term of the loan to _____ the lender's interests.
protect
A part of the indenture limiting certain actions during the term of the loan are termed ______
protective covenants
What are the two major forms of long-term debt?
public issue and private issue
The term structure of interest rates examines the ______.
relationship between short-term and long-term interest rates
If a bond is issued with a call provision, it allows the issuer to ______ part or all of the bond at defined prices and times.
repurchase
Which of the following are usually included in a bond's indenture?
the repayment arrangements the total amount of bonds issued
The degree of interest rate risk depends on Blank______
the sensitivity of the bond's price to interest rate changes
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
time to maturity coupon rate
What is the purpose of a sinking fund?
to create a fund to repay bonds when they fall due
It is the duty of the bond _____ to manage the sinking fund so that bonds can be repaid.
trustee
Most of the time, a floating-rate bond's coupon adjusts ______.
with a lag to some base rate
What four variables are required to calculate the value of a bond?
yield to maturity par value coupon rate time remaining to maturity
What are municipal bonds?
Bonds that have been issued by state or local governments
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 is a bond's current yield?
Current yield = annual coupon payment / current price
Which of the following is not a difference between debt and equity?
Equity is publicly traded, while debt is not.
A sukuk is a contract that is related to
Islamic law. riba.
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 does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds