chapter 6 connect financial management
A corporate bond's yield to maturity
- Changes over time - Is usually not the same as bonds coupon rate
Which of the following are usually included in a bonds indenture?
- 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 - The interest on municipal bonds in exempt from federal taxes
which of the following are bonds that have actually been issued
- a convertible bond - a put bond - a CoCo bond
a bond's coupon payment is
- a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
if bonds for AT&T are quoted at 115, they can be purchased
- at 115% of par value plus accrued interest
what are "fallen angel" bonds?
- bonds that have dropped from investment grade to junk bond status
A debenture is a bond secured with collateral?
- false
if a bond is selling at a discount from its par value, the YTM must be ________ the coupon rate
- greater than
a bond with a BB rating has a _______ than a bond with an BBB rating
- 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
- increases
the term structure of interest rates examines the________.
- relationship between short-term and long-term interest rates
what does a bond's rating reflect?
- the ability of the firm to repay its debt and interest on time
what is the nominal rate of return on an investment?
- the actual percentage change in the dollar value of an investment unadjusted for inflation
the term structure of interest rates describes
- the relationship between nominal rates and time to maturity - the pure time value of money
Which of the following are true about a bonds face value?
-It is the principal amount repaid at maturity -It is also known as the par value
As a general rule, which of the following are true of debt and equity?
-The maximum reward for owning debt is fixed -Equity represents an ownership interest
which of the following are true of bonds?
-They are issued by both corporations and governments -They are normally interest-only loans
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.
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
a limitation of bond ratings is that they
-focus exclusively on default risk
when interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows______.
-increases
Why is the bond market less transparent than the stock market?
-many bond transactions are negotiated privately
-what are the three components that influence the Treasury yield curve?
-the real rate of return - the interest rate risk premium - expected future inflation
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
What is the asked price?
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
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds
Which of the following may increase the yield in corporate bonds as compensation to investors but will not impact Treasury bond yields?
Liquidity premium Default risk premium
What four variables are required to calculate the value of a bond?
Par value Coupon rate Time remaining to maturity Yield to maturity
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
discount bond
bonds that sell for less than the face value
a limitation of bond ratings is that they
focus exclusively on default risk
A bond with a BB rating has a ______ Than a bond with an BBB rating
higher risk of default
BONDS Accrued Interest
interest that has been earned but not yet received b the current bondholder
What does the dirty price represent?
it includes the quoted price and accrued interest
What will happen to a bonds time to maturity as the years go by?
it will decline
the interest rate risk premium is the additional compensation demanded by investors for holding _________ bonds.
longer-term
A zero coupon bond is a bond that
makes no interest payments
Which on of the following is the most important source of risk from owning bonds?
market interest rate fluctuations
Equity represents an _______ interest of a firm.
ownership
Junk bonds have the following features:
they are rated below investment grade bonds
the price you actually pay to purchase a bond will generally exceed the clean price.
true
Most of the time, a floating-rate bond's coupon adjusts ___.
with a lag to some base rate