Finance exam 2
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. 4% 20% 5% 6%
5%
Crossover bonds can also be called _____ bonds. 3B 2B 5B 4B
5B
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 the following terms apply to a bond? Coupon rate Dividend yield Time to maturity Par value
Coupon rate Time to maturity Par value
What is a bond's current yield? Current yield = Annual coupon payment/Price Current yield = Current price/Face value Current yield = Annual coupon/Par value Current yield = Annual coupon/Face value
Current yield = Annual coupon payment/Price
What is the nominal rate of return on an investment? Multiple choice question. It is the percentage change in the dollar value of an investment adjusted for inflation. It is the average rate of return earned by similar investments. It is the actual percentage change in the dollar value of an investment unadjusted for inflation. It is the rate of return earned in excess of the average rate of return earned by similar investments..
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
Why is the bond market less transparent than the stock market? Many bond transactions are negotiated privately. The press does not adequately cover the bond market. The bond market is bigger than the stock market. The bond market is not subject to any regulations.
Many bond transactions are negotiated privately.
What are some features of the OTC market for bonds? Dealers are restricted geographically to be in the U.S. Reason: Dealers in the OTC market are around the country and around the world. The OTC has no designated physical location. OTC dealers are connected electronically.
The OTC has no designated physical location. OTC dealers are connected electronically.
What does the AAA rating assigned by S&P mean? The firm is likely to enjoy high stock valuations in the future The firm is in a weak position to meet its debt obligations The firm is unlikely to pay interest on time The firm is in a strong position to meet its debt obligations
The firm is in a strong position to meet its debt obligations
As a general rule, which of the following are true of debt and equity? The maximum reward for owning debt is fixed. Debt and equity represent the same financial claims. Equity represents an ownership interest. Creditors generally have voting power.
The maximum reward for owning debt is fixed. Equity represents an ownership interest.
Junk bonds have the following features: They all have very long maturities They pay a low rate of interest They have a low probability of default They are all zero coupon bonds They are rated below investment grade bonds
They are rated below investment grade bonds
Which of the following are bonds that have actually been issued? a silent bond a bunt-n-run bond a put bond a convertible bond a CoCo bond
a put bond a convertible bond a CoCo bond
True or false: A debenture is a bond secured with collateral.
false
A key difference between interest payments and dividend payments is? interest is not tax deductible interest is tax deductible dividends are not tax deductible dividends are tax deductible
interest is tax deductible dividends are not tax deductible
Bond ratings are based on the probability of default risk, which is the risk that ___. the bond's maturity may change inflation may increase in the short term the bond's issuer may not be able make all the required payments the bond's interest rates may change unexpectedly
the bond's issuer may not be able make all the required payments
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
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price. True False
true
What does historical data suggest about the nature of short-term and long-term interest rates? Multiple choice question. Sometimes short-term rates are higher and sometimes long-term rates are higher. Long-term rates are always higher than short-term rates. Short-term rates are equal to the long-term rates. Short-term rates are always higher than long-term rates.
Sometimes short-term rates are higher and sometimes long-term rates are higher.
What are municipal bonds?
Bonds that have been issued by state or local governments
What four variables are required to calculate the value of a bond? Par value Time remaining to maturity Price at the time of bond issue Yield to maturity Coupon rate
Par value Time remaining to maturity Yield to maturity Coupon rate
Which of the following is not a difference between debt and equity? A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy Equity represents ownership interest while debt does not Equity is publicly traded while debt is not
Equity is publicly traded while debt is not
A part of the indenture limiting certain actions during the term of the loan are termed ________. protective covenants bond restrictions bond protections indenture restrictions
protective covenants
The coupon payments on floating-rate bonds are __. very high adjustable fixed very low
adjustable
A bond's coupon payment is: a coupon that can be used by bondholders to receive discounts on goods produced by the corporation issuing the bonds a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders a variable interest amount that is paid to bondholders based on the federal funds rate interest that is paid by the bond issuer when a bond matures
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
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. Interest at the end of each year, the amount of which is based on the current market rate of interest, and $1,000 at the end of 10 years. $1,060 at the end of 10 years. $60 at the end of each year in interest and $100 at the end of each year in principal payments.
$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.
True or false: Long-term debt has maturities greater than one year. True False
true
If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes
0%
What are crossover bonds? Bonds that have both an investment grade and a junk bond rating Bonds that have moved completely from junk bond to investment grade status Bonds that are continually improving their ratings Bonds that have fallen to all junk bond ratings status
Bonds that have both an investment grade and a junk bond rating
Which of the following is not a difference between debt and equity? Equity represents ownership interest while debt does not Reason: This selection is true - the question is asking which one is false. Equity is publicly traded while debt is not A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not Reason: This selection is true - the question is asking which one is false. Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy Reason: This selection is true - the question is asking which one is false.
Equity is publicly traded while debt is not
What is a real rate of return? Multiple select question. It is an average rate of return on similar investments. It is a percentage change in buying power. It is a rate of return that has not been adjusted for inflation. It is a rate of return that has been adjusted for inflation.
It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation.
What is a bond's accrued interest? It is interest that has been received but not yet earned. It is additional interest that the firm must pay if interest checks are mailed late. It is the difference between the coupon rate and market rate of interest. It is interest that has been earned but not yet received by the current bondholder
It is interest that has been earned but not yet received by the current bondholder
What is the bid price? It is the price at which a dealer is willing to sell securities. It is the price at which a dealer is willing to buy securities. It is the highest price at which bonds can be bought. It is the price an investor will receive if he sells a bond to a dealer.
It is the price at which a dealer is willing to buy securities. It is the price an investor will receive if he sells a bond to a dealer.
What is the asked price? It is the percentage change in a bond's price since its issue. It is the price at which a dealer is willing to sell a particular security. It is the price at which a dealer is willing to buy a particular security. It is the price at which an investor can buy a particular security from a dealer.
It is the price at which a dealer is willing to sell a particular security. It is the price at which an investor can buy a particular security from a dealer.
What does a Treasury yield curve show? Multiple choice question. It shows the changes in the yield of Treasury bonds over time It shows the changes in the yield of T-bills over time It shows the difference between the yield on Treasury bonds and corporate bonds It shows the yield for different maturities of Treasury notes and bonds
It shows the yield for different maturities of Treasury notes and bonds
Which one of the following is the most important source of risk from owning bonds? Loss of a bond certificate Mergers Market interest rate fluctuations Coupon interest rate fluctuations
Market interest rate fluctuations
What are the cash flows involved in the purchase of a 5-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 5 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 a bond's rating reflect? The number of bonds issued by the corporation since its IPO The ability of the firm to repay its debt and interest on time The debt-equity ratio for the current year The quality of the bond relative to its competitors
The ability of the firm to repay its debt and interest on time
If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?
The bond with a 5% coupon rate
What does the clean price for a bond represent? The quoted price excluding accrued interest The original issue price The original issue price plus accrued interest The quoted price plus accrued interest
The quoted price excluding accrued interest
What are the three components that influence the Treasury yield curve? Multiple select question. The default risk premium Reason: Treasury issues have no default risk. The real rate of return The interest rate risk premium Expected future inflation
The real rate of return The interest rate risk premium Expected future inflation
Which of the following are usually included in a bond's indenture? The names of the bondholders The total amount of bonds issued The details of previous bond issues The repayment arrangements
The total amount of bonds issued The repayment arrangements
Which of the following are features of municipal bonds? They are issued by state and local governments. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue. They are not subject to default risk. The interest on municipal bonds is exempt from federal taxes. The interest on municipal bonds is always exempt from state taxes.
They are issued by state and local governments. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue. The interest on municipal bonds is exempt from federal taxes.
Which of the following are true of bonds? Bond principal does not have to be repaid They are normally interest-only loans They are issued by both corporations and governments
They are normally interest-only loans They are issued by both corporations and governments
The US government borrows money by issuing:
Treasury bonds Treasury notes
What is a corporate bond's yield to maturity (YTM)? YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features. YTM is the yield that will be earned if the bond is sold immediately in the market. Reason: YTM is the prevailing market interest rate for bonds with similar features. It is also the expected return for an investor who buys the bond and holds it to maturity. Investors who sell the bond before maturity may earn a different rate. YTM is another term for the bond's coupon rate. Reason: YTM is the prevailing market interest rate for bonds with similar features. It is also the expected return for an investor who buys the bond and holds it to maturity. The coupon rate determines the periodic interest payments made to investors.
YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features.
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 bonds for AT&T are quoted at 115, they can be purchased: at 115% of current market price for $115 per bond for $1150 at 115% of par value plus accrued interest
at 115% of par value plus accrued interest
If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____. Multiple choice question. for $99.50 per bond for $995, which includes any accrued interest. for $995 less any accrued interest at 99.5 percent of face value plus any accrued interest
at 99.5 percent of face value plus any accrued interest
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________. Multiple choice question. recall allowance refunding provision callback provision call provision
call provision
A corporate bond's yield to maturity: remains fixed over the life of the bond changes over time is usually not the same as a bond's coupon rate is alway equal to a bond's coupon rate
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
The bid-ask spread represents the ___. issuer's profit dealer's profit bondholder's profit difference between the coupon rate and the market rate
dealers profit
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
Which three of the following are common shapes for the term structure of interest rates? Multiple select question. downward sloping humped upward sloping V-shaped
downward sloping humped upward sloping
True or false: Bond ratings are concerned only with the possibility of price changes.
false
True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal. True False
false
A limitation of bond ratings is that they ____. Multiple choice question. change every day Reason: Bond ratings change only when the firm's circumstances change such that there is an impact on default risk. focus on both default risk and interest rate risk Reason: Bond ratings focus only on default risk; they do not incorporate interest rate risk. are generated by the issuing corporations, not an external independent agency Reason: Bond ratings are generated by external independent agencies. focus exclusively on default risk
focus exclusively on default risk
A bond with a BB rating has a ______ than a bond with an BBB rating. higher risk of default longer duration lower risk of default shorter duration
higher risk of default
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____. remains unchanged decreases increases
increases
The nominal rate is found by adding the _____ and the real rate of return. Multiple choice question. inflation coupon discount price
inflation
if coupon rate is 10 percent and bond is selling at a premium then we know the YTD will be
lower than 10 percent
A zero-coupon bond is a bond that ____. is sold at a premium produces no taxable income has no market value makes no interest payments
makes no interest payments
Consider a bond with a 10% annual coupon rate, 15 years to maturity and a par value of $1,000
on slide
Which of the following variables is NOT required to calculate the value of a bond? Coupon rate Remaining life of bond Market yield to maturity Original issue price of bond
original issue price of bond
Equity represents a(n) _____ interest of a firm.
ownership
What are the two major forms of long-term debt? private issue public issue debentures Canadian debt
private issue and public issue
The term structure of interest rates examines the ____. Multiple choice question. relationship between short-term and long-term interest rates relationship between par value and market price changes in bond values over time relationship between coupon rates and market yield
relationship between short-term and long-term interest rates
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
The term structure of interest rates describes ________. Multiple select question. the relationship between nominal rates of interest and inflation the relationship between real interest rates and inflation the pure time value of money the relationship between nominal rates and time to maturity the relationship between rates on corporate bonds and Treasury bonds
the pure time value of money the relationship between nominal rates and time to maturity
The degree of interest rate risk depends on ____. the face value of a bond the sensitivity of the bond's coupon rate to interest rate changes how many times the interest rate changes in a year the sensitivity of the bond's price to interest rate changes
the sensitivity of the bond's price to interest rate changes
True or false: Current yield = Annual coupon payment/Price True False
true
True or false: In general, the price that is paid for a bond will exceed its quoted price. True false question. True False
true
True or false: Low-grade bonds may not be rated by major rating agencies. True False
true
True or false: The government sells Treasury notes and bonds to the public every month. True False
true
True or false: The price you actually pay to purchase a bond will generally exceed the clean price. True False
true
A debenture is a(n) _____ bond, for which no specific pledge of property is made. variable fixed unsecured secured
unsecured
When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have? Multiple choice question. Downward sloping Flat Upward sloping Humped
upward sloping
Most of the time, a floating-rate bond's coupon adjusts ____. with a lead to some base rate on a continual basis with a lag to some base rate dramatically
with a lag to some base rate