FIN 320
What is a bond's current yield?
Current yield = annual coupon payment / current (price)
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
What are some features of the OTC market for bonds?
The OTC has no designated physical location. OTC dealers are connected electronically
What is a real rate of return?
It is a rate of return that has been adjusted for inflation. It is a percentage change in buying power.
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.
Equity represents what kind of interest?
Ownership
Which of the following terms apply to a bond?
Par value Coupon rate Time to maturity
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
Pay $800 today and receive $1,000 at the end of 5 years
What are the two major forms of long-term debt?
Public issues and private issues maturities greater than one year
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher. the pure time value of money the relationship between nominal rates and time to maturity
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
What are the three components that influence the Treasury yield curve? What does a Treasury yield curve show?
The interest rate risk premium The real rate of return Expected future inflation It shows the yield for different maturities of Treasury notes and bonds
What of the following are true of bonds?
They are issued by both corporations and governments They are normally interest-only loans
The US government borrows money by issuing:
Treasury bonds Treasury notes
A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
Which of the following are bonds that have actually been issued?
a convertible bond a CoCo bond a put bond
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________.
call provision
A corporate bond's yield to maturity is
changes over time is usually not the same as a bond's coupon rate 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.
A key difference between interest payments and dividend payments is?
interest is tax deductible dividends are not tax deductible Not a difference- Equity is traded while debt is not
A zero-coupon bond is a bond that ____.
makes no interest payments
A part of the indenture limiting certain actions during the term of the loan are termed
protective covenants
The term structure of interest rates describes ________.
relationship between short-term and long-term interest rates
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments The ability of the firm to repay its debt and interest on time
The degree of interest rate risk depends on
the sensitivity of the bond's price to interest rate changes
The government sells Treasury notes and bonds to the public every month.
true
The nominal rate is found by adding the _____ and the real rate of return.
Inflation It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What is the bid price?
It is the price an investor will receive if he sells a bond to a dealer. It is the price at which a dealer is willing to buy securities.
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.
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate Coupon payments are- adjustable