Chapter 7 Finance300
The interest rate risk premium is the:
Compensation investors demand for accepting interest rate risk.
Treasury bonds are:
generally issued as semi-annual coupon bonds.
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
A bond that can be paid off early at the issuer's discretion is referred to as being...
Callable
A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate
II and IV only
The taxability risk premium compensates bond holders for which one of the following?
A bond's unfavorable tax status
A bond that is payable to whomever has physical possession of the bond is said to be in:
Bearer form
A bond's coupon rate is equal to the annual interest divided by which one of the following?
Face Value
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
greater than 7 percent.
Callable bonds generally:
have a sinking fund provision
A Treasury yield curve plots Treasury interest rates relative to:
Maturity
The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
Maturity
Which of the following defines a note?
1) Unsecured 2) Maturity less than 10 years
Interest rates that include an inflation premium are referred to as:
Nominal rates
Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?
Note
The Fisher effect is defined as the relationship between which of the following variables?
Real Rates, Inflation Rates, and Nominal Rates
A call-protected bond is a bond that...
cannot be called during a certain period of time.
The pure time value of money is known as the:
term structure of interest rates
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
increases at a decreasing rate.
Municipal bonds:
pay interest that is federally tax-free.
A deferred call provision is...
prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
Coupon
A bond that has only one payment, which occurs at maturity is defined as...
Zero Coupon
You want to buy a bond from a dealer. Which one of the following prices will you pay?
Asked Price
A bond is quoted at a price of $989. This price is referred to as which one of the following?
Clean Price
Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the
Dirty Price
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
Which one of the following statements concerning bond ratings is correct?
Split rated bonds are called crossover bonds.
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
Spread
Bonds issued by the U.S. government:
are considered to be free of default risk.
Which one of the following is the price a dealer will pay to purchase a bond?
Bid Price
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called...
Call Premium
The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms.
Debenture
Which one of the following relationships is stated correctly?
Decreasing the time to maturity increases the price of a discount bond, all else constant.
Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?
Default Risk.
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
Face Value
Which of the following statements concerning bonds are correct?
I and II only
An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. a current yield that equals the coupon rate III. a yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value
I and IV only
Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate
I and IV only
Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield
II and IV only
Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value
II and IV only
Which one of the following premiums is compensation for expected future inflation?
Inflation
The current yield is defined as the annual interest on a bond divided by which one of the following?
Market Price
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
Protective Covenants
Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?
The bonds will sell at a premium if the market rate is 5.5 percent.
The liquidity premium is compensation to investors for:
The lack of an active market wherein a bond can be sold for its actual value.
A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield-to-maturity is less than the coupon rate.
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?
Yield to Maturity
You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
You will realize a capital gain on the bond if you sell it today.
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
Protective covenants:
are primarily designed to protect bondholders.
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond?
decrease the market price
Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
in registered form
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
long-term; zero coupon
An indenture is
the legal agreement between the bond issuer and the bondholders