Ch. 7 Interest Rates and Bond Evaluation
If you invest in a $1,000 corporate bond that has a 9% coupon and makes semi-annual payments, you can expect to receive _____.
*semi-annual --> 2* 9% / 2 = 4.5% 4.5% = 0.045 $1,000 * 0.045= $45 Answer: $45 every 6 months
Which of these is included in the calculation of a bond's yield to maturity?
-Current price -Par value -Coupon rate
Which of the following variables are required to calculate the value of a bond? -market yield -coupon rate -issue price of the bond -remaining life of bond
-Market yield -Coupon rate -Remaining life of bond
Which of these are required to calculate the current value of a bond? -Par value. -Applicable market rate. -Time remaining to maturity. -Coupon rate. -Price at the time of bond issue.
-Par value. -Applicable market rate. -Time remaining to maturity. -Coupon rate.
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.
All junk bonds typically have which of these features?
-high profitability of default -less than investment-grade rating
What are the 3 components of the nominal rate of return?
-real rate of return -compensation for the inflation effect on the original investment -compensation for the inflation effect on the investment earnings
What are 3 important features of Treasury notes and bonds?
-taxable -highly liquid -default-free
Which 2 prices can be found in the Wall Street Journal's daily Treasury bond listing?
-the bid price -the asked price
Which of the following are common protective covenants?
-the firm must limit dividends to equity holders -the firm cannot merge with any other firm -the firm must maintain working capital at or above a specified level
The reason that interest rate risk is greater for __(1)__ term bonds than for _(2)___ term bonds is that the change in rates has a greater effect on the present value of the __(3)___ that on the present value of the ___(4)__.
1. long 2. short 3. face value 4. coupon payments
Use your calculator to find the YTM on a 20 year, $1,000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1,104.89.
3.75% ??
What is the real rate of return if the nominal rate is 7% and the rate of inflation is 2%?
4.90% ??
If the rate of inflation is 3% and the real rate of return is 5%, the nominal rate is approx. ___%.
8 ??
A bond has a quoted price of $984.63, a face value of $1,000, a semi-annual coupon of $20, and a maturity of 10 years. What is the current yield and its YTM?
Current Yield= Annual coupon / Price Step 1: Find the "annual" coupon. $20(SEMI) *2= $40 (ANNUAL coupon) Step 2: Find CY. $40 / $984.63 = 4.06% YTM= 4.19% ??
What is a bond's current yield?
Current yield = Annual coupon payment / Current price
What is a real state of return?
It is a rate of return that has been adjusted for inflation.
What is the nominal rate of return on an investment?
It is the rate that has not been adjusted for inflation.
How is an APR computed?
Rate per period * Number of periods per year
What is the effective annual yield for a bond that pays interest semi-annually and has a quoted yield to maturity of 10%?
[ 1 + (0.10/2)^2 ] - 1 = 10.25%
A bond's YTM will exceed its current yield when the bond is selling at _____.
a discount (The YTM will exceed the current yield when a bond sells for less than par value (dicount).)
What is the present value of the annual interest payments on a 10-year, $1,000 par value bond with a coupon rate of 10% paid annually, if the yield on similar bonds is 9%?
annual interest payment= $1,000*10%=$100 present value of annuity=annual interest payment[1-(1+interest rate)^-time period]/rate =$100[1-(1.09)^-10]/0.09 =$100*6.417657701 = $641.77
The relationship between bond prices and the market rate of interest is _____.
inverse; if the market rate of interest rises, bond prices will fall
In general, a corporate bond's coupon rate ____.
is fixed until the bond matures
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 rates on financial securities are generally quoted as:
nominal rates
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 (as long as you stay consistent, you will get the same answer)
A sinking fund is one type of:
repayment provision
In case of default:
subordinated debt holders must give preference to other specified creditors
The amount by which the call price exceeds the par value of the bond is called:
the call premium
The Fisher effect decomposes the nominal rate into:
the inflation rate and the real rate.
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
If a $1,000 par value is trading at a premium, the bond is:
trading for more than $1,000 in the market.
What is the definition of a bond's time to maturity?
It is the number of years until the face value is due to be repaid.
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
How is the real rate of return different from the nominal rate of return?
The real rate is adjusted for the effect of inflation whereas nominal rate is not adjusted for the effect of inflation.
In an inflationary environment, the nominal rate will be ___ the real rate.
greater than
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.
interest earnings only
