FNAN 300 Chapter 6 Connect Learnsmart
Which of the following is not a difference between debt and equity?
equity is publicly traded while debt is not
Which three of the following are common shapes for the term structure of interest rates?
humped, downward sloping, upward sloping
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows _____________.
increases
What does the dirty price represent?
it includes the quoted price and accrued interest
What is a real rate of return?
it is a rate of return that has been adjusted for inflation, and it is a percentage change in buying power
Which of the following are true about a bond's face value?
it is also known as the par value and it is the principal amount repaid at maturity
Equity represents a(n) __________________ interest of the firm.
ownership
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100 and a coupon interest payment of $100 per year?
10%
What will your aftertax yield be on a corporate bond that is currently priced to yield 7% percent if you are in the 25 percent tax bracket?
5.25%
What is the equation for approximating the nominal rate of return?
R= r+h
What are the two unique features of a U.S. federal government bond?
U.S. Treasury issues are exempt from state income taxes and are considered to be default-free
A corporate bond's yield to maturity:
changes over time and is usually not the same as a bond's coupon rate
What four variables are required to calculate the value of a bond?
coupon rate, par value, time remaining to maturity, and yield to maturity
Which three components determine the shape of the term structure of interest rates?
inflation premium, real interest rate, and interest rate risk premium
Which of the following variables is NOT required to calculate the value of a bond?
original issue price of bond
What does the clean price for a bond represent?
the quoted price excluding accrued interest
Which of the following are usually included in a bond's indenture?
the repayment arrangements and the total amount of bonds issued
What are some features of the OTC market for bonds?
the OTC has no designated physical location and OTC dealers are connected electronically
What is the nominal rate of return on an investment?
it is the actual percentage in the dollar value of an investment unadjusted for inflation
What is the asked price?
it is the price at which a dealer is willing to sell a particular security, and it is the price at which an investor can buy a particular security from a dealer
What does a Treasury yield curve show?
it shows the yield for different maturities of Treasury notes and bonds
What will happen to a bond's time to maturity as the years go by?
it will decline
A zero-coupon bond is a bond that _____________.
makes no interest payments
What are the two major forms of long-term debt?
public and private issue
What is a corporate bond's yield to maturity (YTM)?
YTM is the prevailing market interest rate for bonds with similar features and YTM is the expected return for an investor who buys the bond today and holds it to maturity
A bond with a BB rating has a ________________ than a bond with an BBB rating.
higher risk of default
A key difference between interest payments and dividend payments is?
interest is tax deductible and dividends are not tax deductible
Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?
liquidity premium and default risk premium
What does the AAA rating assigned by S&P mean?
the firm is in a strong position to meet its debt obligations
What are the three components that influence the Treasury yield curve?
the interest rate risk premium, the expected future inflation, and the real rate of return
The term structure of interest rates describes _____________.
the relationship between nominal rates and time to maturity and the pure time value of money
The degree of interest rate risk depends on _______________.
the sensitivity of the bond's price to interest rate changes
The US government borrows money by issuing:
treasury notes and bonds
Which of the following are bond that have actually been issued?
a CoCo bond, a convertible bond, and a put bond
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
the 10-year bond
What is the current yield on a $1,000 par value bond that sells for $900 if the coupon rate is 10 percent?
11.11%
You invest a bond paying 6% interest paid semiannually with a face value of $1,000. The bond matures in 8 years and similar bonds yield 5%. What is the current value of the bond?
$1,065.28
A corporation issues 50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7 percent. What will the total annual interest expense be for the corporation?
$3.5 million
A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?
$5,000
What is the price of a U.S. Treasury bond that is listed at 90 if the par value is $1,000?
$900
The model that precisely specifies the relationship between the nominal rate and the real rate is : R= the real nominal rate; r= the real rate; h= the rate of inflation
(1+R) = (1+r) x (1+h)
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
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.
5%
What are crossover bonds?
bonds that have both an investment grade and a junk bond rating
What is a bond's current yield?
current yield= annual coupon payment/current price
When interest rates in the market rise, we can expect the price of bonds the price of bonds to _____________.
decrease
As a general rule, which of the following are true of debt and equity?
equity represents an ownership interest, and the maximum reward for owning debt is fixed
Bonds issued by state and local governments are called _______________ ________________.
municipal bonds
Which of the following terms apply to a bond?
par value, time to maturity, and coupon rate
