FIN 320 Chapter 6

Which of the following variables is NOT required to calculate the value of a bond?

Original issue price of bond

If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.

5%

What are crossover bonds?

Bonds that have both an investment grade and a junk bond rating

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

Coupon Rate Time to maturity

Which of the following terms apply to a bond?

Coupon rate Par value Time to maturity

When interest rates in the market rise, we can expect the price of bonds to ____.

Decrease

What is a discount bond?

Discount bonds are bonds that sell for less than the face value.

True or false: Bond ratings are concerned only with the possibility of price changes.

False

True or false: Bonds that have dropped into junk territory are called "trash" bonds.

False

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.

False

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.

Increases

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.

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

Market interest rate fluctuations

Which of the following is true of zero coupon bonds?

No coupon payments are made on the bonds

What four variables are required to calculate the value of a bond?

Par value Yield to maturity Coupon rate Time remaining to maturity

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

Junk bonds have the following features:

They are rated below investment grade bonds

Differences between U.S. Treasury bonds and corporate bonds?

Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.

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: Low-grade bonds may not be rated by major rating agencies.

True

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

True

What are the two unique features of a U.S. federal government bond?

U.S. Treasury issues are exempt from state income taxes. U.S. Treasury issues are considered to be default-free.

A bond's coupon payment is:

a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

A corporate bond's yield to maturity:

changes over time is usually not the same as a bond's coupon rate

A bond's____________ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

coupon

A limitation of bond ratings is that they ____.

focus exclusively on default risk

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______$1,000.

less than

If a $1,000 par value bond is trading at a premium, the bond is:

trading for more than $1,000 in the market

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate