Conceptual Exam 3 #1

A 'fallen angel' is a bond that has moved from

Investment grade to speculative grade

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

A US Treasury bond that is quoted at 100.11 is selling

for 100.11 percent of face value

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk

increases at a decreasing rate

The annual coupon payment divided by the market price of a bond is called the

Current yield

Which of these markets is the most active?

The market for Treasury bonds

Which of the following statements is correct concerning the term structure of interest rates?

-Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. -The term structure of interest rates includes both an inflation premium and an interest rate risk premium -the real rate of return has minimal, if any, effect on the slope of the term structure of interest rates

A bond that is payable to whomever has physical possession of the bond is said to be

A bearer bond

All else constant, a coupon bond that is selling at a premium, must have

A yield to maturity that is less than the coupon rate

Protective covenants

Are primarily designed to protect bondholders from future actions of the bond issuer

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following?

Callable

A bond is quoted at a price of $989. This price is referred to as which one of the following?

Clean price

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8%. What rate should you use to discount the real cash flows?

Comparable real rate

The _______ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer

Default risk

The price a buyer actually pays to purchase a bond is called the _____ price

Dirty

The written, legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is called the

Indenture

Parts of the indenture limiting certain actions that might be taken during the term of the

Protective covenants

The items included in a bond indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the

Protective covenants

In the event of default, ____ debt holders must give preference to more _____ debt holders in the priority of repayment distributions

Subordinated; senior

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the

Term structure of interest rates

Currently, the bond market requires a return of 11.6% on the 10-year bonds issued by Winston Industries. The 11.6% is referred to as which one of the following?

Yield to maturity

All else constant, a bond will sell at _______ when the yield to maturity is ______ the coupon rate

a discount: higher than

Bonds issued by the US government

are considered to be free of default risk

Credit ratings

measure relative default risk; i.e., AAA-rated corresponds to 'least likely to default,' not to 'has an X% chance of default.' AND are broadly divided up into 'investment grade' and 'speculative grade' or 'junk bonds'