FINAN 450 Chp 7 Smartbook
A bond pays annual interest payments of $50, has a par value of $1000, and a market price of $1200. How is the coupon rate computed? - $50/[($1000 + 1200)/2] - $50/($1200 - 1000) - $50/$1000 - $50/$1200
$50/$1000
Which one of these correctly specifies the relationship between the nominal rate and the real rate? - (1 + R) = (1 + r) x (1+h) - (1+h) = (1 + R) x (1 + r) - R = r + h - (1 + r) = (1 + R) x (1+ h)
(1 + R) = (1 + r) x (1+h)
Select all that apply What are three important features of Treasury notes and bonds? - Highly liquid - Tax-free - Default-free - Taxable
- Highly liquid - Default-free - Taxable
Select all that apply What are some reasons why the bond market is so big? - Many corporations have multiple bond issues outstanding. - Federal government borrowing activity in the bond market is enormous. - Corporations are required to raise more money from bonds than from stocks. - Various state and local governments also participate in the bond market.
- Many corporations have multiple bond issues outstanding. Federal government borrowing activity in the bond market is enormous. - Various state and local governments also participate in the bond market.
Select all that apply Which of the following are usually included in a bond's indenture? - The bond's rating - The repayment arrangements - The names of the bondholders - The total amount of bonds issued
- The repayment arrangements - The total amount of bonds issued
When the US government wants to borrow money for the long-term (more than one year) it issues: - Treasury notes - Treasury bonds - Treasury stocks - Treasury bills
- Treasury notes - Treasury bonds
In terms of time to maturity, US Treasury notes and bonds have initial maturities ranging from ___ years. - 5 to 25 - 2 to 30 - 5 to 20 - 10 to 30
2 to 30
A bond with exotic features is often called a ___ bond. - Dog - Angel - Bird - Cat
Cat
As an investor in the bond market, why should you be concerned about changes in interest rates? - You shouldn't be as interest rate changes do not affect bonds. - Changes in interest rates lead to changes in the par value of a bond. - Changes in interest rates cause changes in bond prices. - Changes in interest rates change the interest payments on fixed coupon bonds.
Changes in interest rates cause changes in bond prices.
What is a bond's current yield? - Current yield = Annual coupon / Face value - Current yield = Annual coupon payment / Current price - Current yield = Annual coupon / Par value - Current yield = Current price / Face Value
Current yield = Annual coupon payment / Current price
Which of the following is not a difference between debt and equity? - A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not - Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy - Equity represents ownership interest while debt does not - Equity is publicly traded while debt is not
Equity is publicly traded while debt is not
True or False A bond's value is not affected by changes in the market rate of interest.
FALSE
True or False The real rate of return will generally be higher than the nominal rate of return.
FALSE
A limitation of bond ratings is that they ___. - Focus exclusively on default risk - Focus on both default risk and interest rate risk - Are generated by the issuing corporations, not an external independent agency - Change every day
Focus exclusively on default risk
The federal government can raise money from financial markets to finance its deficits by ___. - Raising taxes - Requesting foreign aid - Issuing bonds - Issuing stocks
Issuing bonds
What is the real rate of return? - It is a percentage change in prices of goods in the economy - It is an average rate of return on similar investments - It is a rate of return that has not been adjusted for inflation - It is a rate of return that has been adjusted for inflation
It is a rate of return that has been adjusted for inflation
Which one of the following is the most important source of risk from owning bonds? - Loss of a bond certificate - Coupon interest rate fluctuations - Market interest rate fluctuations - Mergers
Market interest rate fluctuations
What are the two major forms of long-term debt? - Public issue and privately placed - Indentured and free - Privately placed and unsecured - Current and deferred
Public issue and privately placed
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounting at the ___ rate. - Cross - Inflation - Nominal - Real
Real
Within the context of financial markets, complete the following equation: Bid - Ask = ___.
Spread
What is the largest security market in the world in terms of trading volume? - The US derivatives market - The US corporate bond market - The US stock market - The US Treasuries market
The US Treasuries market
Why does a bond's value fluctuate over time? - The coupon rate and par value are fixed, while market interest rates change - A bond's par value changes over time - The coupon rate varies, while market interest rates are fixed - A bond's value does not fluctuate over time
The coupon rate and par value are fixed, while market interest rates change
The Fisher effect decomposes the nominal rate into: - The inflation rate and the real rate - The real rate and the yield to maturity - The inflation rate and the yield to maturity
The inflation rate and the real rate
If you own corporate bonds, you will be concerned about interest rate risk as it affects ___. - The market price of the bonds - The time to maturity - Coupon rates - The par value of the bonds
The market price of the bonds
The main reason it is important to distinguish between debt and equity is that the benefits and risks ___. - Never change - Are similar - Are different
are different
The ___ yield is the bond's annual coupon divided by its price.
current
With ___-rate bonds, the coupon payments are adjustable.
floating
The written agreement between the corporation and the lender detailing the terms of the debt issue is the ___.
indenture
When the term structure of interest rates is downward sloping, ___. - There is no relationship between short-term and long-term rates - Short-term rates are higher than long-term rates - Short-term rates are lower than long-term rates - Short-term rates equal long-term rates
Short-term rates are higher than long-term rates
True or False Equity represents an ownership interest.
TRUE
True or False The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.
TRUE
True or False The price you actually pay to purchase a bond will generally exceed the clean price.
TRUE
In general, a corporate bond's coupon rate ___. - Changes in sync with market interest rates - Is fixed until the bond matures - Decreases as a bond nears maturity - Changes every year
is fixed until the bond matures
Select all that apply Which of the six factors determine the yield on a bond? - Voting rights - Default risks - Real rate of return - Expected future inflation - Liquidity - Taxability - Interest rate of return
- Real rate of return - Expected future inflation - Interest rate risk - Default risk - Taxability - Liquidity
Secondary markets in sukuk are extremely illiquid because most sukuk are: - Riskier than other bond issues - Bought and held to maturity - Legally suspect - Subject to religious interpretation
Bought and held to maturity
Which of these risks is addressed by bond ratings? - Call risk - Default risk - Maturity risk - Interest rate risk
Default risk
A zero coupon bond is a bond that ___. - Produces no taxable income - Makes no interest payments - Is sold at a premium - Has no market value
Makes no interest payments
What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1000 if the current price is $800? Assume the market rate of interest is 5 percent. - Pay $800 today and receive $1000 at the end of 5 years - Pay $800 today and receive $800 plus $250 at the end of 5 years - Pay $800 today and receive $1250 at the end of 5 years - Pay $800 today, receive $50 every year for 5 years, and receive $1000 at the end of 5 years
Pay $800 today and receive $1000 at the end of 5 years
What does the clean price for a bond represent? - The original issue price - The quoted price plus interest accrued since the last coupon date - The quoted price, which excludes interest accrued since the last coupon date - The original issue price plus interest accrued since the last coupon date
The quoted price, which excludes interest accrued since the last coupon date
Which of the following institutions issue bonds that are traded in the bond market? - The federal government - State governments - Sole proprietorships - Public corporations
- The federal government - State governments - Public corporations
Select all that apply 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 - Debt and equity represent the same financial claims - Creditors generally have voting power
- The maximum reward for owning debt is fixed - Equity represents an ownership interest
Select all that apply The US government borrows money by issuing: - Treasury pass-through certificates - Treasury bills - Treasury bonds - Treasury notes
- Treasury bills - Treasury bonds - Treasury notes
What is the coupon rate on a bond that has a par value of $1000, a market value of $1100, and a coupon interest payment of $100 per year? - It will depend on the bond rating for that year - 9.09% - 1% - 10%
10%
Most of the time, a floating-rate bond's coupon adjusts ___. - Dramatically - With a lead to some base rate - On a continual basis - With a lag to some base rate
With a lag to some base rate