fin mngt LS chapter 7
Suppose you own a 30 year bond issued by GE and a 2 year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE will lose more b/c it has a longer maturity
How is the real rate of return different from the nominal rate of return?
The real rate of return is calculated after subtracting the inflation effect from the nominal rate of return.
A corporate bond's yield to maturity ______.
changes over time can be greater than, equal to, or less than the bond's coupon rate
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
The reason that interest rate risk is greater for______ term bonds than for _____ term bonds is that the change in rates has a greater effect on on the present value of the ____ than on the present value of the _______.
long, short, face value, coupon payments
A bond's YTM considers the total interest earnings and the change in the bond's price while the current yield considers ______.
the annual coupon payment and the bond price
Why does a bond's value fluctuate over time?
the coupon rate and par value are fixed, while market interest rates change
What is the definition of a bond's time to maturity?
the number of years until the face value is due to be repaid
What are some of the features of the OTC (over the counter) market for bonds?
1) dealers are connected electronically 2) as no designated physical location
What are some reasons why the bond market is so big?
1) fed gov borrowing activity in the bond market is enormous 2) various state & local gov. also participate in the bond market 3) many corps. have multiple bond issues outstanding
Which of the following are true about a bond's face value?
1) it is also known as the par value 2) it is the principal amount repaid at maturity
What info is needed to compute a bond's yield to maturity?
1) the bond's current price 2) time to maturity 3) coupon rate
Which of the following is true about interest rate risk?
1) the lower the coupon rate, the greater the interest rate is 2) the longer the time to maturity, the greater the interest rate risk
What are the three components of the nominal rate of return?
1)compensation for the inflation effect on the original investment 2) compensation for the inflation effect on the investment earnings 3) real rate of return
What is a corporate bond's yield to maturity?
1)the prevailing market interest rate for bonds with similar features 2) is the expected return for an investor who buys the bond today and holds it to maturity
Which of these is included in the calculation of a bond's yield to maturity?
par value current price coupon rate
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.
real
What is the asked price?
the price at which the dealer is willing to sell
What is a premium bond?
a bond that sale for more than face value
A bond's YTM will exceed its current yield when the bond is selling at _____.
a discount
Which two prices can be found in Wall Street Journal's daily Treasury bond listing?
asked price bid price
When an investor sells a bond to a dealer, the price paid by the dealer is known as ______.
bid price
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
Which of these are required to calculate the current value of a bond?
coupon rate time remaining to maturity applicable market rate par value
Which of the following terms apply to a bond?
coupon rate time to maturity par value
The bid-ask spread represents the _____.
dealer's profit
In an inflationary environment, the nominal rate will be ____ than the real rate.
greater than
What is a real rate of return?
has been adjusted for inflation
When interest rates in the market fall, bond values are likely to increase b/c the present value of the bond's remaining cash flows _____.
increases
In general, a corporate bond's coupon rate_______.
is fixed until the bond matures
Which of the following is true about a multi-year typical bond's coupon?
it is a fixed annuity payment
What is the nominal rate of return on an investment?
it is the rate that has not been adjusted for inflation
A market is considered transparent if______
its prices and trading volume are easily observed
Why is the bond market less transparent than the stock market?
many bond transactions are negotiated privately
There is a _____ relationship between market interest rates and bond values.
negative
Which of the following variables are required to calculate the value of a bond?
remaining life of bond market yield coupon rate
Which of the following institutions issue bonds that are traded in the bond market?
the Federal Gvt. state gvt. public corp.
What does the clean price for a bond represent?
the quoted price, which excludes interest accrued since the last coupon date
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
twice a year
