Chapter 7

what is a bond's current yield?

current yield= annual coupon/ current price

Which are common protective covenants?

-The firm must maintain working capital at or above a specified level -The firm must limit dividends to equity holders -The firm cannot merge with any other firm

What is included in the calculation of a bond's yield to maturity?

-coupon rate -current price -par value

Which term applies to a bond?

-coupon rate -par value -time to maturity

A Japanese company has a bond outstanding that sells for 90 percent of its ¥100,000 par value. The bond has a coupon rate of 4.9 percent paid annually and matures in 20 years. What is the yield to maturity of this bond?

=RATE(20,49,-900,1000,0,0) =5.75%

A bond pays annual interest payments of $50, pas a par value of $1000, and a market price of $1200. How is the coupon rate computed?

=annual coupon/ face value =50/1000

Bourdon Software has 9 percent coupon bonds on the market with 20 years to maturity. The bonds make semiannual payments and currently sell for 107.3 percent of par. What is the current yield on the bonds?

current yield= annual coupon/ current price =90/1073

What is a corporate bond's yield to maturity?

-YTM is the prevailing market interest rate for bonds with similar features -YTM is the expected return for an investor who buys the bond today and holds it to maturity

If you invest in a $1,000 corporate bond that has a 9% coupon and makes semi-annual payments, you can expect to receive ______ each 6 months.

1. 9%/2= 4.5% 2. 1000*.045= $45

Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 17 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave?

1. use =pv in excel -rate= .08/2 -nper= time *2 -pmt always remains the same 2. to calculate % change= change/1000

Find 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.

1104.89= 45*((1-(1/1.0375^20)/.0375) + 1000/(1.0375)^20

A bond's YTM will exceed its current yield when the bond is selling at ______.

A discount

If you invest in a corporate bond, how many times can you expect, in general, to receive interest?

Twice a year

Bond J has a coupon rate of 7 percent and Bond K has a coupon rate of 13 percent. Both bonds have 15 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds?

In this example, do the same thing as the previous, except the rate for both will be the 10% plus or minus 2, and the coupon rates are only used to determine payment

The relationship between bond prices and the market of interest is _________

Inverse; if the market rate of interest rises, bond prices fall

Which is true about a multi year typical bond's coupon?

It is a fixed annuity payment

The amount by which the call price exceeds the par value of the bond is called:

The call premium

Why does a bond's face value fluctuate over time?

The coupon rate and par value are fixed, while the market interest rates change

In general, the stock market is more transparent than the real estate market.

True, more price and volume info is available

Which is the largest security market in the world in terms of trading volume?

US treasuries market

If a $1000 face value US treasury bond is quoted at 99.5, then the bond can be purchased ________.

at 99.5% of face value plus any accrued interest

what is NOT a difference between debt and equity?

equity is publicly traded while debt is not

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%?

pv of coupons= C*((1-(1/1+r^t)/r) =641.77

How is APR computed?

rate per period * # periods per year

What does a moody's bond rating of C typically indicate?

the issuer is in default

What are some features of the OTC market for bonds?

-OTC dealers are connected electronically -OTC has no designated physical location

Which institutions issue bonds that are traded in the bond market?

-Public corps -Federal gov -State gov

Which variables are required to calculate the value of a bond?

-Remaining life of bond -Market yield -Coupon rate

Which are usually included in a bond's indenture?

-Repayment arrangements -Total amount of bonds issued

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?

$5,000 per bond; par value is not affected by interest rates, market price, or time.

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 current yield and YTM.

-Current= 40/984.63= 4.06% -YTM=4.19

Why is the bond market so big?

-Fed gov borrowing activity in the bond market is enormous -Many corps have multiple bond issues outstanding -Various state and local govts also participate in the bond market

A corporation issues 50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7 percent. What will the total annual interest expense be for the corporation?

3.5 million (???)

What is the price of a US treasury bond listed at 122 if the par value is $5000?

6100

What is the effective annual rate for a bond with a 7% yield to maturity that makes semi annual interest payments? (hint: 7% annual is 3.5% per 6 month period)

=(1.035)^2-1 =7.12%

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 6.2 percent paid annually. If the yield to maturity is 7.3 percent, what is the current price of the bond?

=62*((1-(1/(1.073)^20/.073))+(1000/(1.073)^20) =886.13

Sqeekers Co. issued 10-year bonds a year ago at a coupon rate of 7 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 5.3 percent, what is the current bond price?

=PV(0.0265,18,35,1000,0) =1120.44

Suppose that today you buy a bond with an annual coupon of 7 percent for $1,090. The bond has 14 years to maturity. A) What rate of return do you expect to earn on your investment? Assume a par value of $1,000. B) What is the HPY on your investment? (your realized return is known as the holding period yield)

A) =RATE(14,70,-1090,1000,0,0) B)

A firm's bond rating sheds light on its _________ risk.

Default

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 the present value of the ___ than on the present value of the ___.

Long Short Face value coupon payments

Why is the bond market less transparent than the stock market?

Many bond transactions are negotiated privately

Which is the most important source of risk from owning bonds?

Market rate interest rate fluctuations