Ch.7 Part 1
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% Calculator
Use your calculator to find the YTM on a 20 year, $1000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1104.89.
3.75% Calculator
The degree of interest rate risk depends on ______.
the sensitivity of the bond's price to interest rate changes
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ______.
$1,220 = 900+320
If you purchase a bond costing $1,143 with a par value of $1,000 that pays a semi-annual coupon of 5%, how much will each coupon payment be?
$25 Calculator
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.
Which of the following variables are required to calculate the value of a bond?
- Coupon rate - Market yield - Remaining life of bond
Which of these is included in the calculation of a bond's yield to maturity?
- Coupon rate - Current price - Par value
What are the sources of information for generating bond ratings?
- Information from the corporation being rated, - Information collected by the bond rating agency.
Which of the following are true about a bond's face value?
- It is also known as the par value - It is the principal amount repaid at maturity
All junk bonds typically have which of these features?
- Less than investment-grade rating - High probability of default
Which of the following are common protective covenants?
- The firm cannot merge with any other firm - The firm must limit dividends to equity holders - The firm must maintain working capital at or above a specified level
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
Which of the following are usually included in a bond's indenture?
- The total amount of bonds issued - The repayment arrangements
Place the following bonds in order of security as defined in the US.
1. Mortgage bonds 2. Debentures
What is the effective annual rate for a bond with a 7 percent yield to maturity that makes semi-annual interest payments? (Hint: 7 percent annually is 3.5 percent per six-month period.)
7.12% =(1.035)^2-1 Calculator
What is a premium bond?
A bond that sells for more than face value
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
Which of the following is true about a multi-year typical bond's coupon?
It is a fixed annuity payment
What is the definition of a bond's time to maturity?
It is the number of years until the fasce value is due to be repaid.
What is an interest-only loan?
It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations (and time to maturity)
How is an APR computed?
Rate per period x Number of periods in a year
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE bond will lose more because it has a longer maturity.
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
Why did Disney Issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?
To lock-in historically low interest rates for a long time
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
Twice a year
A bond's YTM will exceed its current yield when the bond is selling at _____.
a discount
A bond with a BBB rating has a _____ than a bond with an A rating.
higher risk of default
The relationship between bond prices and the market rate of interest is ______.
inverse; if the market rate of interest rises, bond prices will fall
In general, a corporate bond's coupon rate _____.
is fixed until the bond matures
If a $1,000 par value bond is trading at a premium, the bond is:
less than
The reason that interest rate risk is greater for ____ term bonds than for _____ term bonds is that the change in rates has a greater effect on the present value of the _____ than on the present value of the ______.
long; short; face value; copuon payments
The reason that interest rate risk is greater for ____ term bonds than for ______ term bonds is that the change in rates has a greater effect on the present value of the _____ than on the present value of the ______.
long; short; face value; coupon payments
There is a(n) ______ relationship between market interest rates and bond values.
negative
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
The amount by which the call price exceeds the par value of the bond is called:
the call premium
What information is needed to compute a bond's yield-to-maturity?
- Time to maturity - The bond's current price - Coupon rate
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
A bond has quoted price of $984.63, a face value of $1,000, a semi-annual coupon of $20, and a maturity of 10 years. Match its current yield and its YTM below.
- YTM: 4.19% - Current yield: 4.06%
A corporate bond's yield to maturity _______.
- changes over time - can be greater than, equal to, or less than the bond's coupon rate
Which of the following institutions issue bonds that are traded in the bond market?
- public corporations - state governments - the federal government
Which of the following is true about interest rate risk?
- the longer the time to maturity, the greater the interest rate risk - the lower the coupon rate, the greater the interest rate risk