Exam2 Chapter 12
Suppose the coupon rate of a two year corporate bond with semi-annual compounding is 9% and the par value of the bond is $1000. If interest rates have risen to 12% since the bond was issued, then the price of the bond is
$948.02
What is true about inflation-indexed bonds
-It removes inflation risk arising from holding treasury securities. -At maturity, the securities are redeemed at the greater of their inflation-adjusted principal.
Current yield is an ______ of yield to maturity on coupon bonds.
-approximation
Assets with lower interest rates?
-equipment trust certifications -mortgage bonds
Features of the commodity futures modernization act passed by the congress in 2000
-it preempted states from enforcing gaming laws on derivative securities -it allowed investors to bet on securities they did not own -it removed credit default swaps from regulatory oversight
Features of revenue bonds
-revenue of the particular project is used as repayment -they are issued more frequently than general obligation bonds
What is true about feature bonds?
-they have dependable cash flows -they offer more security relative to stocks -their price fluctuates due to changes in market interest rate
Why may corporations raise funds through the capital market?
-to preserve their capital to protect against unexpected needs -to finance their investment projects
Reasons to introduce the trade reporting and compliance engine (TRACE)
-to specify which bond transactions must be reported publicly -to provide a platform that makes transaction data available to the public
Suppose a bond has a par value of $1,000, a coupon interest rate of 11%, and a market price of $875. The current yield of this bond is
12.57%
Suppose a Treasury note with 8 years remaining to maturity consists of a single principal payment at maturity and 16 interest payments, one every six months for 8 years. When this note is stripped, the single Treasury note becomes _____ securities that can be traded individually
17
Suppose a corporate bond pays an interest rate of 7.5% and the marginal tax rate is 28%. Then the equivalent tax-free rate on the bond is
5.4%
Which of the following statements correctly describe the current price? A. It is set such that the seller is indifferent between continuing to receive the cash flow stream provided by the asset and receiving the offer price. B. It is set such that the seller prefers continuing to receive the cash flow stream provided by the asset over receiving the offer price. C. It is set such that the seller prefers receiving the offer price over continuing to receive the cash flow stream provided by the asset. D. As is the case with other financial assets, it is the present value of all future cash flows
Both A and D
After a thorough financial analysis, a firm determines that it needs additional machines to meet the increased demand for its product. This analysis is made using interest rates that reflect the current long-term cost of funds to the firm. Suppose the firm chooses to finance these machines by issuing bonds. What happens if there is an increase in the interest rate?
The increased rate will be less critical compared to what it would have been under money market
T/F FINRA performs the function of consolidating the regulatory and oversight functions of National Association of Securities Dealers (NASD) with the New York Stock Exchange:
True
Should a firm have to liquidate, its bondholders will have _____ of receiving payment over its stockholders
a higher priority
When firms sell securities for the very first time, the issue is _______
an initial public offering
Bond holders face risk of suffering a loss due to changes in the interest rate. This risk is known as
an interest rate risk
_____ describe the lender's rights and privileges and the borrowers' obligation
bond indentures
Current yield equals yield to maturity if the ______
bond price equals the par value of the bond
The distribution of a firm's capital between debt and equity is called its
capital structure
The _____ is the rate of interest paid by the issuer to the investor it _______ with market interest rates
coupon rate does not fluctuate
_____ provide insurance against default in principal and interest payment of a credit instrument
credit default swaps
Where does the capital market trading occur?
either in the primary or in the secondary market
Corporate bonds generally have a face value ______
equal to $1000
trading is governed by the ___
exchange rules
when a firm chooses to issue stock, the market thinks that the stock price of the firm is going to ____ in the future
fall
federal government notes and bonds are ______
free of default risk
healthy firms with sufficient cash flow to pay both bondholders and stockholders _____ have volatile stock prices
frequently
General obligation bonds are backed by _____ of the issuer
full faith and credit
Capital market securities have an original maturity that is _____ one year
greater than
Most long-term interest rates are ______ than short-term rates
higher
Who are the largest purchasers of capital market securities?
households
A function of a financial guarantee?
i gives additional security to the bond purchaser in the event the issuer defaults
Most capital market transactions occur _____
in organized exchanges
What is a bond
it is a security that represents a debt owed by the issuer to the investor
Define market interest rate
it is always equal to the interest rate currently in effect in the market for similar securities
during the 1970s and early 1980s the interest rate on 10 year treasury bonds was _____ the rate of inflation
less than
if the market price of the bond is greater than the par value of the bond, then the current yield of the bond will be _____ the coupon rate of the bond
less than
Issuers of capital market securities..
local government, federal government, and corporations
Mostly, the rate of return on the 90 day treasury bills is _____ the rate of return on the 20- year treasury bonds
lower than
the short-term rates are _____ than long-term rates
more volatile
Examples of a capital market security?
mortgages, bonds and stocks
The municipal bond market
municipal bonds are not default-free
The current yield and yield to maturity are always _____ related to the price of the bond
negatively
In the late 1970s, who were junk bonds difficult to sell as compared to investment grade bonds?
no well-developed secondary market existed
When a financial guarantee is provided with bond, the bond purchaser is concerned with
only the financial health and the credit rating of the insurance company
Violation of rules by companies that trade in securities?
outside business activities, excessive markups, and late reporting
Bonds are traded_____
over the counter
the _____ is the amount that the issuer of a bond must pay a maturity
par value, maturity value
convertible bonds are issued by the firm if it believes that the stock prices are going to _____ in the future
rise
Long-term bonds do not include _____
shares issued by a firm
Governments never issue ____
stock
Describe Treasury STRIPS accurately
the bonds are also referred to as zero-coupon securities
if the repayment terms of a bond are not met,
the holder of the bond has a claim on the assets of the issuer
Describe primary markets
the issuer of the security actually receives the proceeds of the sale
Agency bonds have what type of risk
the risk on such bonds is very low
A secondary market is where ______
the sale of previously issued securities takes place
Why do corporate bonds have a call provision?
to buy back the bond as per the terms of the sinking fund
Maturity: less than 1 year
treasury bill
Maturity: 10 to 30 years
treasury bond
Maturity: 1 to 10 years
treasury note
Capital market investors...
use capital market for long-term investment
treasury bonds have ____ interest rates
very low
when does an investor's bond sell at a premium?
when the market price is higher than the par value