FINC 3210 CH 6
What is the coupon rate of a bond that has a par value of $1,000, a market value of $1,100 and a coupon interest payment of $100 per yeat
10%
which of the following are bonds that have actually been issued?
A CoCo bond a put bond a convertible bond
If the bonds for AT&T are quoted at 115, they can be purchased:
At 115% of par value plus accrued interest
What are municipal bonds?
Bonds that have been issued by states or local governments
What is a bonds current yield
CY=ACP/CP
As a general rule, which of the following are true of debt and equity?
Equity represents an ownership interest. The maximum reward for owning debt is fixed.
A limitation of bond ratings is that they ____.
Focus exclusively on default risk
when interest rated in the market fall, bond values will increase because the present value of the bond's remanding cash flows ____.
Increases
What is a real rate of return?
It is a rate of return that has been adjusted to remove inflation. Its is a percentage change in buying power.
What does historical data suggest about the nature of short-term and long-term interest rates
Sometimes short-term rates are higher and sometimes long-term rates are higher
The relationship between nominal rates, real rates and inflation is called _____
The Fisher Effect
What are some features of the OTC market for bonds
The OTC had no designed physical location. OTC dealers are connected electronically
What are the three components that influence the Treasury yield curve?
expected inflation, the interest rate rick premium, and the real rate of return
A corporate bond's yield to maturity
is usually not the same as a bond's coupon rate. Changes over time.
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 rates.
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.
The bid-ask spread represents the ____.
dealer's profit
T or F: the price you actually pay to purchase a bond will generally exceed the clean price.
True
Which of the following are usually included in a bond's indenture?
The repayment arrangements
The sensitivity of a bond's price to interest rate changes is dependent on which of the following tow variables?
Coupon rate and Time to maturity
Bonds are classified based on the collateral provided to protect bondholders in case of default. Which of the following are unsecured forms of debt?
Debentures (in the U.S.) Notes
What is a discount bond?
Discount bonds are bonds that sell for less than the face value
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5%
Pay $800 today and receive $1,000 at the end of 5 years
What are the two major forms of long-term debt
private issue and public issue
Which of the following is not a difference between debt and equity
Equity is publicly traded while debt is not
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What is the bid price?
It is the price at which a dealer is willing to buy securities/ It is the price an investor will receive if he sells a bond to a dealer.
Which of the following terms apply to a bond?
Par Value Time to maturity and Coupon rate
what four variables are required to calculate the value of a bond?
Par Value, Time remanding to maturity coupon rate, and yield to maturity
What are the two unique features of a US federal government bond?
US Treasury issues are exempt form state income taxes and US treasury issues are considered to be default free
Which three of the following are common shapes for the term structure of interest rates?
Upward sloping, downward sloping, humped
Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields
liquidity premium default rick premium
Equity represents a _____ interest of the firm while debt is ____ an ownership interest in the firm.
ownership, not
Most of the time, a floating - rate bond's coupon adjusts ___.
with a lag to some base rate
What is the inflation premium
It is the additional return demanded by investors to compensate for expected inflation
Which of the following are true about a bond's face value?
It is the principal amount repaid at maturity. It is also known as the par value.
zero-coupon bond is a bond that __.
Makes no interest payments
What is the equation for approximating the nominal rate of return?
R=r+h
If you are holding tow bonds - one with a 5% coupon rate and other with a 8% coupon rate which one is more sensitive to interest rate risk, all other things being equal
The bond with a 5% coupon rate
Bond ratings are based on the probability of default risk, which is the rick that ____.
The bond's issuer may not be able to make all the required payments
The degree of interest rate risk depends on_____.
The sensitivity of the bond's price to interest rate changes
Which of the following are true of bonds?
They are issued by both corporations and governments and they are interest-only loans
which of the following are features of municipal bonds?
They are issued by state and local governments, the interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue, the interest on municipal bonds is exempt from federal taxes.
Junk bonds have the following features
They have a high probability of default. They are rated below investment grade bonds. They pay a high rate of interest
Which of these correctly identify the differences between treasury bonds and corporate bonds
Treasury bonds are free of default rick while corporate bonds are exposes to default risk. Treasury bond offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.
The US Government borrows money by issuing:
Treasury bonds. Treasury notes
T or F: in general, the price that is paid for a bond will exceed its quoted price.
True
What is the asked price?
It is the price at which an investor can buy a particular security from a dealer. It is the price at which a dealer is willing to sell a particular security
What will happen to a bond's time to maturity as the years go by?
It will decline
Which of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
