Ch. 7 Smart Connect Conceptual HW Questions FIN 3403 FSU
In order of security as defined in the US
- 1) Mortgage bonds - 2)Debentures.
The US government borrows money by issuing:
-Treasury notes -Treasury bills -Treasury bonds.
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
-Twice a year.
Difference between a zero coupon bond & conventional bond?
Zero coupon bonds are always issued at a discount. -Zero coupon bonds make no interest payments.
What is required to calculate the current value of a bond?
-Applicable market rate -Coupon rate -Par Value -Time remaining to maturity
Structured note
-Based on financial securities commodities, or currencies.
Convertible bond
-Can be exchanged for shares of stock.
Institutions that issue bonds that are traded in the bond market?
-Public Corporations -The Federal Government -State Governments
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 income tax bracket increases from 15% to 20%. Assume there are no state or local taxes.
- (0%) -*Interest income from munis is exempt from federal income tax.
The liquidity Premium compensates investors based on a bond's _____?
- Degree of marketability.
The amount by which the call price exceeds the par value of the bond is called:
Call Premium
Not a difference between debt and equity?
-Equity is publicly traded while debt is not.
A bond with a BBB rating has a _______ than a bond with an A rating.
-Higher risk of default.
A humped term structure of interest rates indicates that interest rates are expected to _______as the time to maturity increases
-Increase and then decline
In General a corporate bond's coupon rate______?
-Is fixed until the bond matures.
What is a real rate of return?
-It is a rate of return that has been adjusted for inflation.
Bond's Face Value:
-It is also known as the par value. -It is the principal amount repaid at maturity.
Variables required to calculate the value of a bond?
-Remaining life of bond -Market yield -Coupon rate
Which has a higher value, the bid price quote or the asked price quote?
-The asked price quote is higher.
Which two prices can be found in the "Wall Street Journal's" daily Treasury bond listing?
-The asked price. -The bid price.
Common Protective Covenants
-The firm cannot merge with any other firm. -The firm must maintain working capital at or above a specified level. -The firm must limit dividends to equity holders.
Features of a municipal bond:
-The interest on municipal bonds is exempt from federal taxes. -They are issued by state and local governments.
What is the bid price?
-The price at which a dealer is willing to buy securities.
What is the asked price?
-The price at which a dealer is willing to sell.
How does the real rate of return differ from the nominal rate of return?
-The real rate of return removes the effect of inflation from the nominal rate.
Which of the following are usually included in a bonds indenture?
-The repayment arrangements. -The total amount of bonds issued.
The degree of interest rate risk depends on_____?
-The sensitivity of the bond's price to interest rate changes.
If a $1000 par value bond is trading at a premium, the bond is:
-Trading for more than $1000 in the market.
When the US government wants to borrow money for the short-term(less than one year) it issues:
-Treasury bills
When the US government wants to borrow money for the long-term(more than one year) it issues:
-Treasury bonds -Treasury notes
Junk bonds typically feature:
-Less than investment-grade rating. -High probability of default.
Which three components determine the shape of the term structure of interest rates?
-Real interest rate -Inflation premium -Interest rate risk premium
Truth about a multi-year typical bond's coupon?
- It is a fixed annuity payment.
ABC Co. issued 1 million 6 % annual coupon bonds that mature in 10 years. The face value is $1000 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 $1000 repayment of principal at the end of 10 years.
What is the effective annual rate on a bond with a yield to maturity of 6% that pays semiannual interest?
-(6.09%)
A corporate bond's yield to maturity ______.
-Can be greater than, equal to, or less than the bond's coupon rate. -Changes over time.
Terms that apply to a bond:
-Coupon rate -Time to maturity -Par value
What is included in the calculation of a bond's yield to maturity?
-Current price -Coupon rate -Par Value
When interest rates in the market rise, we can expect the price of bonds to ______?
-Decrease
What risk is addressed by bond ratings?
-Default risk.
Three important features of Treasury Notes & Bonds:
-Default-free -Taxable -Highly Liquid
What is a discount bond?
-Discount bonds are bonds that sell for less than the face value.
Common shapes for the term structure of interest rates?
-Downward Sloping. -Upward Sloping. -Humped.
What is the nominal rate of return on an investment?
-It is the actual percentage (%) change in the dollar value of an investment.
The definition of a bonds time to maturity?
-It is the number of years until the face value is due to be repaid.
A market is considered transparent if ________.
-Its prices and trading volume are easily observed.
How is APR computed?
-APR = (Rate per period) x (Number of periods per year)
Why is the bond market less transparent than the stock market?
-Many bond transactions are negotiated privately.
Put bond
-Owner can force issuer to repay prior to maturity at a stated price.
CAT bond
-Protect insurance companies from natural disasters.
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be _____.
- $1220 - (TVB) Total Value of a Bond (Formula) * TVB = ( Present value of interest payments on bond + Present value of the par value to be paid at maturity )
What is the current yield on a $1000 par value bond that sells for $900 if the coupon rate is 10 % ?
- ( 11. 11 %) - Formula: Current Yield = { ( Coupon Rate x Par Value of Bond ) / (Selling price of bond) }
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from _________ years.
- (2 to 30)
Secondary markets in sukuk are extremely illiquid because most sukuk are:
- Bought and held to maturity.
Why does a bond's value fluctuate over time?
-The coupon rate and par value are fixed, while the market interest rates changes.
What does AAA rating assigned by S&P mean?
-The firm is in a strong position to meet its debt obligations.
A Bond's Indenture typically includes:
-The total amount of bonds issued. -The repayment arrangements.
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
-Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. -Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. -Treasury bonds are issued by the US government while corporate bonds are issued by corporations.
YTM Steps in calculator
N - number of years x number of payout amounts per year(annual, semi annual, quarterly, etc. ) I/Y - ? (YTM) PV - Current bond price PMT - Coupon payout { (Interest Payout Rate) x (Par Value / Number of payout amounts per year) } **After calculating for I/Y multiply by 2, number of payout amounts per year.
What will happen to the default risk premium during the periods of economic uncertainty?
-It will increase.
If you are in the 15 % tax bracket, what will be your after tax yield on a U.S. Treasury bond that is currently priced at par and yielding 5 % ?
- (4. 25 %) -Formula : After Tax Yield = { (Current yield %) x ( 1 - Tax bracket %) }
A bonds' yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.
- Interest earnings only.