FIN Bonds
A key difference between interest payments and dividend payments is:
-interest is tax deductible. -dividends are not tax deductible.
Which of the following is not a difference between debt and equity?
Equity is publicly traded, while debt is not.
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
Which of the following terms apply to a bond?
-Par value -Coupon rate -Time to maturity
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.
Which of the following are true of bonds?
-They are issued by both corporations and governments. -They are normally interest-only loans.
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.
What four variables are required to calculate the value of a bond?
-coupon rate -par value -time remaining to maturity -yield to maturity
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
-coupon rate -time to maturity
Which of the following are true about a bond's face value?
-it is the principal amount repaid at maturity -also known as the par value
Crossover bonds can also be called _____ bonds.
5b
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
What is a discount bond?
Discount bonds are bonds that sell for less than the face value
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.
True
A bond's coupon payment is:
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders
To find the total bond value, add the present value of the amount paid at maturity to the ______ of the annual coupon payments
annuity present value
To find the total bond value, add the present value of the amount paid at maturity to the ______ of the annual coupon payments. Multiple choice question.
annuity present value
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ______.
call provision
A bond's ___ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
coupon
A bond's ____ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
coupon
When interest rates in the market rise, we can expect the price of bonds to ______.
decrease
Debt cannot be subordinated to
equity
True or false: A debenture is a bond secured with collateral.
false
True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.
false
A limitation of bond ratings is that they ____.
focus exclusively on default risk
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ______.
increases
The bonds of a firm in financial distress may have a market value that is _____ than the face value at maturity.
less
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000
less than
Which one of the following is the most important source of risk from owning bonds?
market interest rate fluctuations
Which of the following variables is not required to calculate the value of a bond?
original issue price of bond
Equity represents a(n) _____ interest of a firm.
ownership
A part of the indenture limiting certain actions during the term of the loan are termed ______.
protective covenants
Which type of debt is given preference in the event of default?
senior
Bond ratings are based on the probability of default risk, which is the risk that _
the bond's issuer may not be able to make all the required payments
Junk bonds have the following features:
they are rated below investment grade bonds
True or false: All else being equal, a 1-year bond's price is less sensitive to interest rate changes as compared to that of a 10-year bond's price.
true
True or false: Low-grade bonds may not be rated by major rating agencies.
true
A debenture is a(n) ______ bond, for which no specific pledge of property is
unsecured
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.
What are "fallen angel" bonds?
Bonds that have dropped from investment grade to junk bond status
If you are holding two bonds—one with a 5 percent coupon rate and the other with an 8 percent coupon rate—which one is more sensitive to interest rate risk, all other things being equal?
The bond with a 5 percent coupon rate.
