Chapter 7
What is a bond's current yield?
Current yield = annual coupon payment / current price
Which of the following is true about a typical multiple-year bond's coupon?
It is a fixed annuity payment.
What are some features of the OTC market for bonds?
OTC dealers are connected electronically. The OTC has no designated physical location.
Which has a higher value, the bid price quote or the asked price quote?
The asked price quote is higher.
What does the clean price for a bond represent?
The quoted price, which excludes interest accrued since the last coupon date.
True or false: Equity represents an ownership interest.
True
The term structure of interest rates examines the ____.
relationship between short-term and long-term interest rates
What is the difference between a bond's "clean price" and its "dirty price"?
The clean price excludes interest accrued since the last coupon payment, while the dirty price includes accrued interest.
The interest from a municipal bond is exempt from ____ income taxes.
federal
As the maturity of a bond increases, interest rate risk increases at a(n) ___ (decreasing/increasing) rate.
decreasing
What does a bond's rating reflect? Multiple choice question. The number of bonds issued by the corporation since its IPO The quality of the bond relative to its competitors The debt-equity ratio for the current year The ability of the firm to repay its debt and interest on time
The ability of the firm to repay its debt and interest on time
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
The asked price The bid price
The correlation between the real rate of interest and every interest rate is:
high
If the market rate of interest ___, bond values increase.
declines
Suppose a bond's clean price is $1,050, and the bond currently has accrued interest of $30. What is the dirty price?
$1080 Reason: $1,050 + 30 = $1,080
In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years.
2 to 30
What is the nominal rate of return on an investment?
It is the rate that has not been adjusted for inflation.
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
Bond yields ___ (are/aren't) quoted like APRs.
are
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
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 per bond
The main reason it is important to distinguish between debt and equity is that the benefits and risks _____. Multiple choice question. are different are similar never change
are different
If a $1,000 face value U.S. Treasury bond is quoted at 85, then the bond can be purchased _____.
at 85 percent of face value plus any accrued interest Reason: Bond prices are quoted as a percentage of face value, not as a dollar amount.
The price that represents what a dealer is willing to pay for a security is the _____.
bid price
If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.
greater than
The ___ premium is the portion of a nominal interest rate or bond yield that represents compensation for lack of ___
liquidity; liquidity
Protective covenants are classified into two types: ___ and ___ covenants.
negative; postive
The OTC has _____ designated physical location.
no
The default risk premium refers to the extra compensation demanded by investors for the possibility that the issuer might ____.
not make all the promised payments
The two major forms of long-term debt are ___ issue and privately placed.
public
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.
real
Within the context of financial markets, complete the following equation: Bid − Ask = Bid-Ask ___
spread
The taxability premium is the additional compensation demanded on ____.
taxable bonds
A bond's YTM will exceed its current yield when the bond is selling at ____.
a discount
A bond with exotic features is often called a _____ bond.
cat
How significant is the inflation premium on the shape of the term structure of interest rates? (Select all that apply.) Multiple select question. Not significant Very significant Less significant than the real rate of return More significant than the real rate of return
Very significant More significant than the real rate of return
In general, a corporate bond's coupon rate ____. Multiple choice question. changes in sync with market interest rates changes every year decreases as a bond nears maturity is fixed until the bond matures
is fixed until the bond matures
What is the price of a U.S. Treasury bond that is listed at 90 if the par value is $1,000?
$900 Reason: $1,000 × 90% = $900
In an inflationary environment, the nominal rate will be _________ the real rate.
greater than
What is the bid price?
he bid is the price at which a dealer is willing to buy securities.
Interest on municipal bonds ___ (is/isn't) federally taxed.
isn't
With ___-rate bonds, the coupon payments are adjustable.
floating
The written agreement between the corporation and the lender detailing the terms of the debt issue is the ___
indenture
The three components of the Treasury yield curve include the real rate, expected future ___ , and the interest rate risk premium.
inflation
The ___ premium is the portion of a nominal interest rate that represents compensation for expected future ___
inflation; inflation
When comparing a 1-year bond's price to a 30-year bond's price, the 1-year bond's price is relatively ___ (sensitive/insensitive) to interest rate changes.
insensitive
A market is considered transparent if ____.
its prices and trading volume are easily observed
One of the components of the nominal rate of return is the compensation for the ___ effect on the original investment.
inflation
The term structure of interest rates is determined by the real rate of interest, the interest rate risk premium, and the ___ premium.
inflation
The Fisher effect decomposes the nominal rate into:
the inflation rate and the real rate
What is accrued interest?
It is interest that has been earned but not yet received.
Which is the largest security market in the world in terms of trading volume?
The U.S. Treasuries market
What is a real rate of return?
It is a rate of return that has been adjusted for inflation.
Which of the following variables are required to calculate the value of a bond? Multiple select question. Remaining life of bond Coupon rate Market yield Issue price of the bond
Remaining life of bond Coupon rate Market yield
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.
How is investing in U.S. Treasury bonds different from investing in corporate bonds?
Treasury issues have no default risk. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.
If an investment appreciates by 7 percent while the rate of inflation is 2 percent, what is the nominal rate of return?
7%
Which three components determine the shape of the term structure of interest rates? Multiple select question. Inflation premium Interest rate risk premium Real interest rate Taxability premium
Inflation premium Interest rate risk premium Real interest rate
Which six factors determine the yield on a bond? Multiple select question. Voting rights Interest rate risk Taxability Liquidity Default risk Expected future inflation Real rate of return
Interest rate risk Taxability Liquidity Default risk Expected future inflation Real rate of return
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 percent.
Pay $800 today and receive $1,000 at the end of 5 years Reason: A zero coupon bond pays no coupon interest. The cash flows are just the purchase today and the repayment of par value in 5 years.
___ is the term that indicates preference in position over other lenders.
Seniority, Senior, or Junior
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.
interest earnings only
True or false: If you invest in junk bonds, there is a high likelihood that you will earn a very high return.
False
True or false: The inflation premium will be higher if the rate of inflation is low.
False
True or false: The real rate of return will generally be higher than the nominal rate of return.
False
In general, which will have a higher pretax yield? (Assume the bonds are comparable.) A municipal bond Both bonds will have the same yield A corporate bond It will depend on the yield on U.S. Treasury bonds
A corporate bond
What are the three components of the nominal rate of return? Multiple select question. Compensation for the inflation effect on the investment earnings Inflation-adjusted risk-free rate of return Compensation for the inflation effect on the original investment Real rate of return
Compensation for the inflation effect on the investment earnings Compensation for the inflation effect on the original investment Real rate of return
How is a conventional bond different from a zero coupon bond?
Conventional bonds can sell at par, at a discount from par, or at a premium over par while zeros must be offered at a discount from par A conventional bond pays periodic interest whiles zeros make no interest payments.
Which of these is included in the calculation of a bond's yield to maturity? Coupon rate Number of bonds issued Par value Current price
Coupon rate Par value Current price Reason: YTM is the discount rate that solves the equation: Price = Coupon x {[1-1/(1+r)^t]/r}+Par/(1+r)^t
What is a discount bond?
Discount bonds are bonds that sell for less than the face value
As a general rule, which of the following are true of debt and equity? Multiple select question. Creditors generally have voting power Equity represents an ownership interest Debt and equity represent the same financial claims The maximum reward for owning debt is fixed
Equity represents an ownership interest The maximum reward for owning debt is fixed
What are the three components of the Treasury yield curve? Multiple select question. Expected inflation Real rate of return Interest rate risk premium Liquidity risk premium
Expected inflation Real rate of return Interest rate risk premium
Corporate bond dealers are now required to report trade information through _____.
TRACE
Which is more transparent, the stock market or the bond market?
The stock market is more transparent.
How is an original issue discount bond (OID) different from a zero coupon bond?
An OID has a very low coupon rate, while a zero coupon bond pays no coupon.
What are original issue discount bonds?
Bonds that are issued with a very low coupon rate.
What are municipal bonds? Multiple choice question. U.S. Treasury bonds that are only available in some states Secured loans obtained from a local bank by state or local governments Bonds issued by a corporation for state and local projects Bonds that have been issued by state or local governments
Bonds that have been issued by state or local governments
What are "fallen angel" bonds? Multiple choice question. Bonds that have been bought by angel investors Bonds that cannot be rated due to their unique cash flow patterns Bonds that have flown into higher a ratings category Bonds that have dropped from investment grade to junk bond status
Bonds that have dropped from investment grade to junk bond status
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 prices.
If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____.
at 99.5 percent of face value plus any accrued interest
When an investor sells a bond, the price received by a dealer is always the ____.
bid price
The longer the term, the ___ (smaller/greater) the interest rate sensitivity.
greater
The U.S. Treasuries market is the _____ in the world in terms of trading volume.
largest
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.
less than
If the term structure of interest rates is upward sloping, then ____.
long-term rates are higher than short-term rates
The interest rate risk ___ is the compensation investors demand for bearing interest rate risk.
premium
Place the following bonds in order of security as defined in the United States: Mortgage Bonds Debenture
1. Mortgage Bonds 2. Debenture
Which of the following is true about a typical multiple-year bond's coupon? It is a fixed interest payment paid at the time the bond matures. The interest payment will vary with the market rate of interest. It is a fixed annuity payment. Interest payments are paid at the discretion of CFO.
It is a fixed annuity payment.
Which one of the following is the most important source of risk from owning bonds? Multiple choice question. Coupon interest rate fluctuations Loss of a bond certificate Mergers Market interest rate fluctuations
Market interest rate fluctuations
What are the federal income tax implications of receiving $50 in interest income from a municipal bond versus a corporate bond?
Only the interest on the corporate bond will be taxed.
You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
The bond with the 5 percent coupon rate is more sensitive. Reason: All other things being equal, the lower the coupon rate, the greater the interest rate risk.
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change
What does a Moody's bond rating of C typically indicate? The bond has been repaid The issuer is in default The bond is classified as medium grade The issuer has closed its doors
The issuer is in default
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
True or false: In general, the stock market is more transparent than the real estate market.
True
True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
True
How is a zero coupon bond different from a conventional bond? Multiple select question. Zero coupon bonds have shorter maturity periods. Zero coupon bonds are sold at a premium. Zero coupon bonds make no interest payments. Zero coupon bonds are always issued at a discount.
Zero coupon bonds make no interest payments. Zero coupon bonds are always issued at a discount.
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; coupon payments; face value long; short; face value; coupon payments short; long; face value; coupon payments
long; short; face value; coupon payments
All other things being equal, the ___ (lower/higher) the coupon rate, the greater the interest rate risk.
lower
If a given set of cash flows is expressed in ___ terms and discounted at the ___ rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the real rate.
nominal; nominal
The ___ premium is the portion of a nominal interest rate or bond yield that represents compensation for unfavorable ___ status.
taxability; tax
Which of the following are common protective covenants? Multiple select question. the firm cannot merge with any other firm the firm must maintain working capital at or above a specified level the firm must pledge assets to other lenders the firm must issue additional long-term debt within a specified period the firm must limit dividends to equity holders
the firm cannot merge with any other firm the firm must maintain working capital at or above a specified level the firm must limit dividends to equity holders
What is a premium bond?
A bond that sells for more than face value
Which of the following is true about interest rate risk? Multiple select question. All else equal, the lower the coupon rate, the greater the interest rate risk. All else equal, the longer the time to maturity, the lower the interest rate risk. All else equal, the lower the coupon rate, the lower the interest rate risk. All else equal, the longer the time to maturity, the greater the interest rate risk.
All else equal, the lower the coupon rate, the greater the interest rate risk. All else equal, the longer the time to maturity, the greater the interest rate risk.
Which of the following are true about a bond's face value? Multiple select question. It is also known as the par value. A bond's face value is the same for all corporations. It is the market value of the bond at the time of maturity. It is the principal amount repaid at maturity.
It is also known as the par value. It is the principal amount repaid at maturity.
What is the definition of a bond's time to maturity? Multiple choice question. It the period of time that has elapsed since the bond was issued It is the number of years until the bond is sold by the bondholder It is the number of years until the face value is due to be repaid. It is the number of years the corporation is expected to be in existence
It is the number of years until the face value is due to be repaid.
What does the AAA rating assigned by S&P mean? Multiple choice question. The firm is in a weak position to meet its debt obligations. The firm is likely to enjoy high stock valuations in the future. The firm is in a strong position to meet its debt obligations. The firm is unlikely to pay interest on time.
The firm is in a strong position to meet its debt obligations.
The amount by which the call price exceeds the par value of the bond is called the _____.
call premium
If a bond is rated Baa by Moody's and BB by Standard & Poor's, the bond will be regarded as a(n) _____ bond.
crossover
is an unsecured bond, for which no specific pledge of property is made.
debenture
Longer-term bonds have ___ (smaller/greater) interest rate sensitivity because a ___ (smaller/larger) portion of a bond's value comes from the face amount.
greater; larger
The relationship between bond prices and the market rate of interest is ____.
inverse; if the market rate of interest rises, bond prices will fall
What are three important features of Treasury notes and bonds? Default-free Taxable Tax-free Highly liquid
Default-free Taxable Highly liquid
Which one of these correctly specifies the relationship between the nominal rate and the real rate?
(1 + R) = (1 + r) × (1 + h)
The U.S. government borrows money by issuing: Multiple select question. Treasury pass-through certificates Treasury bonds Treasury bills Treasury notes
Treasury bonds Treasury bills Treasury notes
What are some reasons why the bond market is so big? Multiple select question. Corporations are required to raise more money from bonds than from stocks. Various state and local governments also participate in the bond market. Federal government borrowing activity in the bond market is enormous. Many corporations have multiple bond issues outstanding.
Various state and local governments also participate in the bond market. Federal government borrowing activity in the bond market is enormous. Many corporations have multiple bond issues outstanding.
A bond's ___ rate is the stated interest payment made on a bond.
coupon
The ___ yield does not include the capital gain from the price discount, whereas the YTM does include it.
current
The ___ yield is the bond's annual coupon divided by its price.
current
If you were classified as a high income/high tax bracket investor, you might find municipal bonds an attractive investment because ____.
income from municipal bonds is exempt from federal taxes
According to the approximation formula for the nominal rate of return (R), the nominal rate will ________ if inflation (h) increases.
increase
The _____ premium is the portion of a nominal interest rate or bond yield that represents compensation for lack of _____.
liquidity; liquidity
A bond's time to ___ is the number of years until the face value is due to be repaid.
mature or maturity
The federal government can raise money from financial markets to finance its deficits by ___.
issuing bonds
The interest rate risk premium is the additional compensation demanded by investors for holding ____ bonds.
longer-term
A company may decide to issue bonds with maturities of greater than 30 years in order to lock in ___ (low/high) interest rates for a long time.
low
A zero coupon bond is a bond that ____.
makes no interest payments
True or false: A bond's value is not affected by changes in the market rate of interest.
False
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.
If a $1,000 par value bond is trading at a premium, the bond is _____.
trading for more than $1,000 in the market
A Treasury yield curve depicts the _____.
yields for different maturities of Treasury securities
If the market rate of interest rises, the value of the bond will ____ (fall/rise).
fall
What is the formula to determine the price of a U.S. Treasury bond listed at 122 if the par value is $5,000?
$5,000 × 122%
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 Reason: The longer the term, the greater the interest rate sensitivity.
What is the asked price?
The asked price is the price at which a dealer is willing to sell.
True or false: In general, the price that is paid for a bond will exceed its quoted price.
True
True or false: Interest earned on Treasury notes and bonds is taxable
True
Secondary markets in sukuk are extremely illiquid because most sukuk are:
bought and held to maturity
A 10-year AAA corporate bond is most apt to have a yield that ____ the yield on a 10-year AAA state government bond.
exceeds
A humped term structure of interest rates indicates that interest rates are expected to ______ as the time to maturity increases.
increase and then decline
As the time to maturity increases, the interest rate risk premium ____.
increases at a decreasing rate
One of the components of the nominal rate of return is the ___ compensation for the effect on the original investment.
inflation
A ___ fund is an account managed by the bond trustee for the purpose of repaying the bonds.
sinking
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
What is the likely impact on all interest rates when the real rates are high?
It will increase
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 Reason: Bond value = $320 + 900 = $1,220
What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?
$950 Reason: Total value = $200 + 750 = $950
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% Reason: Coupon rate = $100/$1,000 = .10, or 10%
The information needed to compute a bond's yield to maturity includes the bond's ___,coupon rate, and maturity date. (Enter one word per blank.)
price
A sinking fund is one type of: repayment provision coupon payment
repayment provision
In case of default: Multiple choice question. subordinated debt holders are paid after all other security holders subordinated debt holders must give preference to equity holders subordinated debt holders must give preference to other specified creditors subordinated debt holders receive preference over other specified creditors
subordinated debt holders must give preference to other specified creditors
Which of the following are true about a bond's face value? Multiple select question. It is the principal amount repaid at maturity. A bond's face value is the same for all corporations. It is also known as the par value. It is the market value of the bond at the time of maturity.
It is the principal amount repaid at maturity. It is also known as the par value.
When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called ___.
bonds
The amount by which the call price exceeds the par value of the bond is called the _____. Multiple choice question. coupon rate call provision call premium deferred call provision
call premium
A ___ provision allows the company to repurchase or "___" part or all of the bond issue at stated prices over a specified period.
call; call
A corporate bond's yield to maturity ____.
changes over time can be greater than, equal to, or less than the bond's coupon rate
A firm's bond rating sheds light on its _________ risk. Multiple choice question. default nominal total interest rate
default
A bond with a BBB rating has a ______ than a bond with an A rating. Multiple choice question. shorter duration higher risk of default longer duration lower risk of default
higher risk of default
Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will _____.
increase
When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows ____.
increases
As the maturity of a bond increases, interest rate risk ____.
increases at a decreasing rate
When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ____ 6 percent. equal to greater than lower than
lower than
What are crossover bonds? Multiple choice question. Bonds that have moved completely from junk bond to investment grade status Bonds that are continually improving their ratings Bonds that have both an investment grade and a junk bond rating Bonds that have fallen to all junk bond ratings status
Bonds that have both an investment grade and a junk bond rating
Assume you own a bond that was issued by a blue-chip company. If the market rate of interest rises, what will happen to the value of your bond?
The bond value will fall.
True or false: If you invest in a bond that is rated AAA by S&P, you can be reasonably assured that your investment has very little default risk.
True
What will happen to the default risk premium during periods of economic uncertainty?
It will increase.
Which of these are required to calculate the current value of a bond? Multiple select question. Applicable market rate Par value Time remaining to maturity Coupon rate Price at the time of bond issue
Applicable market rate Par value Time remaining to maturity Coupon rate
How has TRACE improved transparency in the corporate bond market?
Corporate bond dealers are now required to report trade information through TRACE.
Which of the following is not a difference between debt and equity? Multiple choice question. Equity represents ownership interest while debt does not Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not Equity is publicly traded while debt is not
Equity is publicly traded while debt is not
What does the dirty price represent?
It includes the quoted price and interest accrued since the last coupon payment.
Which of the following terms apply to a bond? Multiple select question. Par value Coupon rate Time to maturity Dividend yield
Par value Coupon rate Time to maturity
What are the two major forms of long-term debt? Multiple choice question. Current and deferred Public issue and privately placed Privately placed and unsecured Indentured and free
Public issue and privately placed
What is the equation for approximating the nominal rate of return?
R = r + h
How is an APR computed?
Rate per period × Number of periods per year
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.
How is the real rate of return different from the nominal rate of return?
The real rate of return is adjusted for the effect of inflation whereas nominal rate is not adjusted for the effect of inflation.
Which of the following are usually included in a bond's indenture? Multiple select question. The total amount of bonds issued The bond's rating The repayment arrangements The names of the bondholders
The total amount of bonds issued The repayment arrangements
Which of the following are features of municipal bonds? Multiple select question. They are not subject to default risk. They are issued by state and local governments. The interest on municipal bonds is always exempt from state taxes. The interest on municipal bonds is exempt from federal taxes.
They are issued by state and local governments. The interest on municipal bonds is exempt from federal taxes.
What information is needed to compute a bond's yield-to-maturity? Multiple select question. Inflation rate Time to maturity The bond's current price Coupon rate
Time to maturity The bond's current price Coupon rate
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds? Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds are issued by the US government while corporate bonds are issued by corporations. Treasury bonds do not offer any tax benefits to investors but corporate bonds do.
Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
Twice a year
True or false: The major difference between Western financial practices and Islamic law is that Islamic law does not permit charging or paying interest.
true
If you are holding a municipal bond that is trading at par to yield 6 percent, by how much will your aftertax yield change if your income tax bracket increases from 15 percent to 20 percent. Assume there are no state or local taxes
0% Reason: Interest income from munis is exempt from federal income tax.
All junk bonds typically have which of these features? Multiple select question. High probability of default Less than investment-grade rating Zero-coupon rate Time to maturity of 10 years or more
High probability of default Less than investment-grade rating
What is a corporate bond's yield to maturity (YTM)? Multiple select question. YTM is the yield that will be earned if the bond is sold immediately in the market. YTM is the prevailing market interest rate for bonds with similar features. YTM is another term for the bond's coupon rate. 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. YTM is the expected return for an investor who buys the bond today and holds it to maturity.
The ___ price excludes interest accrued since the last coupon payment, while the ___ price includes accrued interest.
clean; dirty
The Treasury yield curve plots the yields on Treasury notes and bonds relative to ___
maturity
The rates on financial securities are generally quoted as ___ rates.
nominal
The rates on financial securities are generally quoted as _____ rates.
nominal
In case of default: Multiple choice question. subordinated debt holders are paid after all other security holders subordinated debt holders receive preference over other specified creditors subordinated debt holders must give preference to other specified creditors subordinated debt holders must give preference to equity holders
subordinated debt holders must give preference to other specified creditors
If you are in the 20 percent tax bracket, what is your aftertax yield on a par value municipal bond yielding 5 percent? Ignore state and local taxes.
5% Reason: Interest income from a muni is exempt from federal income tax so the after-tax yield equals the before-tax yield.
CAT bond <->Protects insurance companies from natural disasters Convertible bond<->Can be exchanged for shares of stock Put bond<->Owner can force issuer to repay prior to maturity at a stated price Structured note<-> Based on financial securities, commodities, or currencies
CAT bond <->Protects insurance companies from natural disasters Convertible bond<->Can be exchanged for shares of stock Put bond<->Owner can force issuer to repay prior to maturity at a stated price Structured note<-> Based on financial securities, commodities, or currencies
What will the impact be on your risk exposure if your bond has recently been categorized as a "fallen angel"?
Your risk will increase.
In financial markets the difference between the __ price and the ask price is known as the spread.
bid
When the term structure of interest rates is downward sloping, ____.
short-term rates are higher than long-term rates
Most corporate bonds pay coupon interest payments ___ times per year.
two
Why is the YTM of a discount bond greater than the bond's current yield?
The current yield does not include the capital gain from the price discount.
