FIN 300 Exam 2

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

Equity is publicly traded while debt is not

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

The issuer is in default

Which of the following is true about interest rate risk?

All else equal, the longer the time to maturity, the greater the interest rate risk. All else equal, the lower the coupon rate, the greater the interest rate risk.

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

Changes in interest rates cause changes in bond prices.

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

Coupon rate Market yield Remaining life of bond

What is a discount bond?

Discount bonds are bonds that sell for less than the face value.

As a general rule, which of the following are true of debt and equity?

Equity represents an ownership interest The maximum reward for owning debt is fixed

All junk bonds typically have which of these features?

High probability of default Less than investment-grade rating

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

It is a fixed annuity payment.

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.

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.

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 one of the following is the most important source of risk from owning bonds?

Market interest rate fluctuations

What are the two major forms of long-term debt?

Public issue and privately placed

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?

The bond value will fall.

Why does a bond's value fluctuate over time?

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

Which of the following are features of municipal bonds?

The interest on municipal bonds is exempt from federal taxes. They are issued by state and local governments.

If you see that the yield curve has gone inverted ( 2 year yield is higher than the 10 year yield) this means

There is a good chance a recession will occur in the economy in the next 12 months

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

Time remaining to maturity Coupon rate Par value Applicable market rate

How is investing in U.S. Treasury bonds different from investing in corporate bonds?

Treasury issues have no default risk. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.

What is a corporate bond's yield to maturity (YTM)?

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.

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

a discount

A corporate bond's yield to maturity ____.

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

Which of these risks is addressed by bond ratings?

default risk

A bond with a BBB rating has a ______ than a bond with an A rating.

higher risk of default

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

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

interest rate risk

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

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

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

the market price of the bonds

The degree of interest rate risk depends on ____.

the sensitivity of the bond's price to interest rate changes

True or false: If you invest in a bond that is rated AAA by S&P, you can be reasonably assured that your investment has very little default risk.

true