chapter 7 fin man definitions

True or false: A bond's value is not affected by changes in the market rate of interest. True false question.

fasle

When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows ____.

increase

A humped term structure of interest rates indicates that interest rates are expected to ---- as the time to maturity increases. Multiple choice question.

increase and then decline

The written agreement between the corporation and the lender detailing the terms of the debt issue is the

indenture

There is a(n) ______ relationship between market interest rates and bond values.

negative

In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years. Multiple choice question.

2-30 years

As an investor in the bond market, why should you be concerned about changes in interest rates? Multiple choice question.

Changes in interest rates cause changes in bond prices.

Which of the following are true about a bond's face value?

It is the principal amount repaid at maturity. It is also known as the par value.

Why does a bond's value fluctuate over time?

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

Which three of the following are common shapes for the term structure of interest rates?

Upward sloping Humped Downward sloping

Which of the following is not one of the six factors used to determine the yield on a bond?

Voting rights

In financial markets the difference between the ----- price and the ask price is known as the spread.

bid

A corporate bond's yield to maturity ____.

can be greater than, equal to, or less than the bond's coupon rate changes over time

The ---- yield is the bond's annual coupon divided by its price.

current

A zero coupon bond is a bond that ____.

makes no interest payments

If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.

the market price of the bonds

Which one of these correctly specifies the relationship between the nominal rate and the real rate? Multiple choice question.

(1 + R) = (1 + r) × (1 + h)

Which of the following terms apply to a bond?

Coupon rate Time to maturity Par value

What is an interest-only loan?

It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.

Which of these are required to calculate the current value of a bond?

Par value Time remaining to maturity Coupon rate Applicable market rate

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. Multiple choice question.

Pay $800 today and receive $1,000 at the end of 5 years

How is the real rate of return different from the nominal rate of return?

The real rate of return is adjusted for the effect of inflation whereas nominal rate is not adjusted for the effect of inflation.

Which of the following are usually included in a bond's indenture?

The repayment arrangements The total amount of bonds issued

What are some reasons why the bond market is so big? Multiple select question.

Various state and local governments also participate in the bond market. Federal government borrowing activity in the bond market is enormous. Many corporations have multiple bond issues outstanding.

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.

When interest rates in the market rise, we can expect the price of bonds to ____.

decrease

A bond's YTM will exceed its current yield when the bond is selling at ____. Multiple choice question.

discount

Longer-term bonds have ---- interest rate sensitivity because a greater-----portion of a bond's value comes from the face amount.

greater larger

In an inflationary environment, the nominal rate will be _________ the real rate. Multiple choice question.

greater than

Within the context of financial markets, complete the following equation: Bid − Ask = Bid-Ask

spread

bond's coupon rate

stated interest payment made on a bond

Bond ratings are based on the probability of default risk, which is the risk that ___. Multiple choice question.

the bond's issuer may not be able make all the required payments

The Fisher effect decomposes the nominal rate into:

the inflation rate and the real rate

When the U.S. government wants to borrow money for the long-term (more than one year) it issues: Multiple select question.

treasury bonds treasury notes

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate

Which of the following is true about a typical multiple-year bond's coupon? Multiple choice question.

It is a fixed annuity payment.

Which of these risks is addressed by bond ratings?

Default risk

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

What are three important features of Treasury notes and bonds?

Taxable Default-free Highly liquid

What does the clean price for a bond represent? Multiple choice question.

The quoted price, which excludes interest accrued since the last coupon date

The U.S. government borrows money by issuing

Treasury bonds Treasury bills Treasury notes

True or false: Equity represents an ownership interest.

True

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 mil

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

A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____. Multiple choice question.

interest earnings only

Which one of the following is the most important source of risk from owning bonds? Multiple choice question.

Market interest rate fluctuations

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

Market yield Coupon rate Remaining life of bond

True or false: The price you actually pay to purchase a bond will generally exceed the clean price.

true

What is a bond's current yield?

Current yield = Annual coupon payment/Current price