FNAN 300 Chapter 6
What are municipal bonds?
bonds that have been issues by state or local government
Suppose a bond's clean price is $1,050, and the bond currently has accrued interest of $30. What is the dirty price?
$1.080 ( 1,050+30)
What does the clean price for a bond represent?
The quoted price excluding accrued interest
a provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _____
call provision
The bid-ask spread represents the ____
dealer's interest
What are three components that influence the Treasury yield curve?
expected future inflation interest rate risk premium the real rate of return
What is the nominal rate of return on an investment?
it is the actual percentage change in the dollar investment unadjusted for inflation
The term structure of interest rate describes_______
the pure time value of money the relationship between nominal rates and time to maturity
What four variables are needed to calculate the value of a bond?
time remaining to maturity coupon rate par value yield to maturity
The relationship between nominal rates, real rates, and inflation is called
the Fisher Effect
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
What is a premium bond?
a bond that sells for more then face value
A bonds coupon payment is
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholder's
If a $1,000 face value US Treasury bonds is quoted at 99.5, then the bond can be purchased _____
at 99.5 percent of face value plus any accrued interest
What does the dirty price represent?
includes the quoted price and accrued price
When interest rates in the market fall, bond value will increase because the present value of the bond's remaining cash flows ____.
increases
Bond's time to maturity
is the number of years until the face value is paid off
Which of the following is the most important source of risk from owning bonds?
market interest rate fluctuations
