Finance Chapter 15

A UCF student owns one $1,000 corporate bond issued by Chevron. The bond pays 8.5 percent. If interest is paid semiannually, what is the amount of the check that he/she will receive at the end of each six-month period?

$42.50

A $1,000 bond carries a 7.55% coupon. The bond currently trades at $1,100. What would the annual interest payment be on this bond?

$75.50

A $1,000 bond has an annual 9.5% coupon and trades for $860. It has 10 years to maturity. What is the current yield and yield to maturity?

11.05% yield with an 11.98% yield to maturity.

Refer to the web work "Bond Basics: Key Bond Investment Considerations". Medium term notes generally have maturities of?

5-12 years

What is the comparable pre-tax yield on a municipal bond yielding 5.2% assuming a marginal tax bracket of 25%?

6.93%

Assume that you are a taxpayer in the 28 percent tax bracket. Also, assume that you purchase a tax-exempt bond that pays 5 percent. What is your pretax equivalent yield?

6.97%

An investor has just purchased a bond with a face value of $1,000 that pays 6 percent annually. The purchase price of the bond was 900, and the bond will mature in 5 years. What is the yield to maturity for this bond?

8.54%

What is the current yield for a $1,000 corporate bond that pays 7 percent and has a current market value of $800?

8.75%

Zero coupon bonds would be best suited for:

A 35 year old woman with a high risk tolerance and no need for current income.

General Obligation Bond

A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it

Registered Coupon Bond

A bond registered for principle only and not for interest

Convertible Bond

A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock

Debenture

A bond that is backed only by the reputation of the issuing corporation

Bearer Bond

A bond that is not registered in the investor's name

Registered Bond

A bond that is registered in the owner's name by the issuing company

Revenue Bond

A bond that is repaid from the income generated by the project it is designed to finance

Mortgage Bond

A corporate bond secured by various assets of the issuing firm

Corporate Bond

A corporation's written pledge to repay a specified amount of money with interest

Municipal Bond

A debt security issued by a state or local government

Call Feature

A feature that allows the corporation to call in or buy outstanding bonds from current bondholders before the maturity date

Trustee

A financially independent firm that acts as the bondholders' representative

Sinking Fund

A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue

Bond Indenture

A legal document that details all of the conditions relating to a bond issue

Bond Ladder

A strategy where investors divide their investments dollars among bonds that mature at regular intervals in order to balance risk and return

Government Bond

A written pledge of a government or a municipality to repay a specified sum of money, along with interest

Yield to Maturity

A yield calculation that takes into account the relationship among a bond's maturity value, the time to maturity, the current price, and the dollar amount of interest

A call feature:

Allows the corporation to buy outstanding bonds from current bondholders before the maturity date

Subordinated Debenture

An unsecured bond that gives bondholders a claim secondary to that of other designated bondholders with respect to interest payments, repayment, and assets

Which of the following statements is correct?

Bonds are a form of debt capital

Which of the following statements is true?

Bonds may be purchased in either the primary or secondary market.

Serial Bonds

Bonds of a single issue that mature on different dates

High-Yield Bonds

Corporate bonds that pay higher interest, but also have a higher risk of defualt

Yield Calculation for a T-Bill

Current yield = discount amount divided by the purchase price

The lowest bond rating issued by Standard & Poor's is:

D

Current Yield

Determined by dividing the annual dollar amount of income generated by an investment by the investment's current market value

Approx. Market Value

Dollar amount of annual interest divided by the comparable interest rate

Bond Price Calculation

Face value * bond quote

If overall interest rates in the economy fall, then a corporate bond with a fixed interest rate will decrease in value.

False

Maturity Date

For a corporate bond, the date on which the corporation is to repay the borrowed money

Refer to the web work "Bond Basics: Key Bond Investment Considerations." With respect to interest rates, callable bonds would normally have:

Higher interest rates than non-callable bonds.

Refer to the web work "Bond Basics: Key Bond Investment Considerations. A $1,000 bond was issued five years ago with an 8% coupon. If interest rates fall for comparable bonds, you would expect the fair market value of the bond to:

Increase

Treasury Note

Issued in $100 units with a maturity between 1 and 10 years. Interest rates are slightly higher than T-Bill and are paid every 6 months

Treasury Bond

Issued in min units of $100 and maturity lasts up to 30 years. Interest rates are higher than T-Bill and T-Note and are paid every 6 months

Convertible Corporate Note

Legal debt that is convertible to shares of common stock at the investor's option

A bond that provides federally tax-free interest income is called a

Municipal bond

Treasury Bill

Sold in a minimum unit of $100 and the maturity could be anywhere between a few days and a year. Discount securities: actual price you pay is less than the maturity value

Treasury Inflation-Protected Securities (TIPS)

Sold in min units of $100 and maturity is at 5, 10, or 30 years. The principal increases with inflation and decreases with deflation. Interest rates are applied to the adjusted principal and rise and fall with inflation/deflation

Tax Equivalent Yield for Municipal Bond

Tax-exempt yield divided by (1-your tax rate)

Face Value

The dollar amount the bondholder will receive at the bond's maturity

Yield

The rate of return earned by an investor who holds a bond for a stated period of time - usually a 12 month period

A government security issued in minimum units of $100 with maturities that are 4-week, 13-week, 26-week, and 52-week is called a:

Treasury Bill

A bond is generally sold in increments of $1,000 (including $10,000 and $100,000).

True

A convertible bond is a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.

True