FIN 3403 Chapter 7 Quiz

A "fallen angel" is a bond that has moved from:

Investment grade to speculative grade.

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000?

$1.50 Market price = (1.0219 - 1.0216) × $5,000 = $1.50

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05 - (1 - t*) = .07. .05 / (1 - t*) = .07. .07 + (1 - t*) = .05. WRONG x .05 × (1 - t*) = .07. .05 × (1 + t*) = .07.

The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent. If the current rate of inflation is 4.68 percent, what is the actual nominal rate of return on these bonds?

10.54 percent R = (1 + .056) × (1 + .0468) - 1 = .1054, or 10.54 percent

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon.

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $911.02, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.8 percent, what is the yield-to-maturity when expressed in real terms?

5.38 percent $911.02 = $35 × ({1 - [1 / (1 + r)(10 × 2)]} / r) + $1,000 / (1 + r)(10 × 2) To solve for r, use trial-and-error, a financial calculator, or a computer. Enter: 20 -911.02 35 1,000 N I/Y PV PMT FV Solve for: 4.1643 YTM = 2 × 4.1643% = 8.33% r = 1.0833 / 1.028 - 1 = 5.38%

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate.

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk.

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

Face value.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Greater than 7 percent.

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

Maturity.

Interest rates that include an inflation premium are referred to as:

Nominal rates.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Real rate.

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

The pure time value of money is known as the:

Term structure of interest rates.

Bonds issued by the U.S. government:

Are considered to be free of default risk.

The collar of a floating-rate bond refers to the minimum and maximum:

Coupon rates.

Which one of the following statements is correct?

The real rate must be less than the nominal rate given a positive rate of inflation.

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

The yield-to-maturity is less than the coupon rate.

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Two month's interest.