FINA CH 6 HW

REVENUE BOND

An example of this type of bond is an airport construction bond in which the revenues generated via the airport's landing fees are used to service the interest payments and pay the maturity payments.

repurchase agreement

Lehman Manufacturers needs to borrow $1 million overnight and is willing to secure the loan with a portfolio of securities that the borrower will repurchase tomorrow at a higher price. This is an example of a(n):

current yield

The portion of a bondholder's return that results from a bond's interest payment, calculated by dividing the bond's interest payment by its market value.

money market mutual fund (MMMF)

A security in which an investment company pools and manages capital from many investors in order to invest primarily in short-term financial assets that would otherwise be unavailable to the individual investors.

default

A bond issuer is said to be in ___________ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.

Face (maturity) value

A bond's __________ is generally $1,000 and represents the amount borrowed from the bond's first purchaser.

call provision

A bond's _____________ gives the issuer the right to redeem a bond at specific times and under specific conditions.

US Treasury Bills

A discounted security issued by the U.S. Treasury to finance the federal government's operations and programs.

commercial paper

A discounted unsecured security issued by large and exceptionally financially sound firms and sold to other sophisticated businesses.

$3,514,567.41

Assume that a $4,000,000 par value, semiannual coupon U.S. Treasury note with three years to maturity has a coupon rate of 3%. The yield to maturity of the bond is 7.60%. Using this information and ignoring the other costs involved, the value of the Treasury note is ... Par value FV = $4,000,000 YTM = 7.60%, so rate =7.60%/2 = 3.8% = 0.038 Coupon PMT = (3%/2) * $4,000,000 = $60,000 Maturity = 3 years so n per = 2*3 = 6 Find present value of the bond

Float-rate bonds

If the coupon interest rate is 4.375% for the first six months and changes to a rate equal to the 10-year Treasury bond rate plus 1.3% thereafter, the bond is called a __________

discount bc lower than face value

Natural Gas Producers Inc. (NGPI) has an issue of 5-year, 9% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 12%, and are noncallable. ========== PV= 891.86 Are the bonds of Natural Gas Producers Inc. selling at a discount, at par, or at a premium?

10.09%

Natural Gas Producers Inc. (NGPI) has an issue of 5-year, 9% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 12%, and are noncallable. =========PV= 891.86 What is the current yield on Natural Gas Producers Inc.'s outstanding bonds? Current Yield = Annual Coupon / Market Price

1.91%

Natural Gas Producers Inc. (NGPI) has an issue of 5-year, 9% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 12%, and are noncallable. =========PV= 891.86 What is the expected one-year capital gain yield on the bonds of Natural Gas Producers Inc.? Current yield = 10.09 Capital Gain Yield = Yield to Maturity - Current Yield

$891.86

Natural Gas Producers Inc. (NGPI) has an issue of 5-year, 9% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 12%, and are noncallable. What is the current market price of NGPI's bonds? Par value FV = $1,000 YTM = 12% = interest Coupon PMT = 9% * $1,000 = $90 Maturity = 5 years Find Present value

municipal bond

New York City issues a general obligation bond for a public project. It is the first formal debt instrument with a fixed repayment schedule issued by a city. What type of bonds are these?

New York City government

New York City issues a general obligation bond for a public project. It is the first formal debt instrument with a fixed repayment schedule issued by a city. Who is the issuer of the bonds?

PRICE RISK

Poornima Gupta is retiring soon, so she is concerned about her investments providing her steady income every year. She is aware that if interest rates rise, the potential earnings power of the cash flow from her investments will increase. In particular, she is concerned that a decline in interest rates might lead to decrease in annual income from her investments. What kind of risk is Poornima most concerned about protecting against?

8.88% existing bonds reflects the rate of return that investors require for holding debt securities issued

Purple Whale Foodstuffs Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,010.35. However, Purple Whale Foodstuffs Inc. may call the bonds in eight years at a call price of $1,060. If Purple Whale Foodstuffs Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par?

The YTC is greater than the YTM on Purple Whale Foodstuffs Inc.'s bonds. If interest rates remain constant, the firm will not call the bonds. The bonds will be held until maturity, so their expected remaining life is 18 years.

Purple Whale Foodstuffs Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,010.35. However, Purple Whale Foodstuffs Inc. may call the bonds in eight years at a call price of $1,060. If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Purple Whale Foodstuffs Inc.'s bonds?

PMT= 1000*9%= $90 n= 8 fv= 1000 pv= -1010.35 int= 8.88 = YTM n= 8 PMT= 90 PV= 1010.35 FV= 1060 int= 9.35 =YTC=

Purple Whale Foodstuffs Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,010.35. However, Purple Whale Foodstuffs Inc. may call the bonds in eight years at a call price of $1,060. Purple Whale Foodstuffs Inc.'s bonds have a yield-to-maturity (YTM) of and a yield-to-call (YTC) of ___________.

a discount

Sometimes borrowers avoid periodic interest payments by agreeing to borrow a given amount and repay a maturity, or face, value that is greater than the amount borrowed. Such a debt instrument is said to be issued at ___________.

federal funds

The Second State Bank has an excess of reserves and is willing to lend them overnight to another depository institution that has a temporary shortage; this lending and borrowing transaction involves the use of:

discount increase 6-month

The T-note described is currently selling at a ____________. Assuming that interest rates remain constant over the life of the note, its price should be expected to _________ as the T-note approaches maturity. When valuing a semiannual coupon bond, the time period (N) in the present value formula is assumed to have a value of ____________ periods.

an indenture

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called _____________ .

issuer

The entity that promises to make the interest and maturity payments for a bond issue is called the

yield to maturity

The return earned by a bondholder who purchases a bond today at its market price, assuming that the bond will be held until maturity and that all coupons and the maturity payment will be received in accordance with the indenture.

investment grade bonds

The term applied to bonds that are judged by their rating agency as being likely to pay their interest and maturity obligations.

Yield to Call (YTC)

The term describes the 13.7% return that would be earned by a bondholder who owns a bond purchased yesterday for $875, that pays interest payments of $40 every six months, has a call price of $1,080, and could be called four years from today.

TRUE

True or False: In general, term loans may be created and modified more easily than bond issues because (1) there are fewer parties to the transaction, and (2) the borrower and the lender have the potential to meet directly to reach mutually agreeable terms.

false

True or False: In general, the provisions and terms of bond issues can be better customized to fit the needs of a wide variety of bondholders, while the provisions of term loans are less flexible.

When interest rates are higher than they were when the bonds were issued

Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

The interest payments from municipal bonds are exempt from state and federal taxes.

Which of the following statements is true about bonds?

treasury bonds

Which of the following types of bonds has the least default risk?