FIN 330 CH 5 & 6 Test

higher EARs

More frequent compounding leads to

PV = PMT / r

Perpetuity formula

Maturity

years until the bond must be repaid

963.04

A bond has 5 years to maturity, a coupon rate of 10% and bonds of similar risk currently provide an 11% return in the market. What should the price for this bond be?

1196.36

A bond has a coupon rate of 10% and 20 years to maturity. Bonds of similar risk currently provide a yield of 8% in the market. What should the selling price of this bond be?

917.56

A bond with 7 years to maturity has a coupon rate of 14%which are paid semiannually. Bonds of similar risk currently provide a 16% yield in the market. What should this bond sell for?

coupon

A bonds ________ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.

unsecured

A debenture is a(n) ______ bond, for which no specific pledge of property is made.

call provision

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ______.

Makes no interest payments

A zero coupon bond is a bond that __________

Principal

Amortization is the process of paying off loans by regularly reducing the ______.

the bond's issuer may not be able to make all the required payments

Bond ratings are based on the probability of default risk, which is the risk that ________________

Perpetuity

C/r is the formula for the present value of a(n)

Bond

Debt contract, interest only loan

Yield to maturity

Discount rate used to determine value of the bond

Annuity

Finite series of equal payments that occur at regular intervals

The bond with a 5% coupon rate

If you are holding two bonds—one with a 5 percent coupon rate and the other with an 8 percent coupon rate—which one is more sensitive to interest rate risk, all other things being equal?

Perpetuity

Infinite series of equal payments

1. Number of periods to maturity 2. YTM 3. Bond value or price 4. Coupon payment 5. Par value

N= I= PV = PMT = FV =

lower

The bonds of a firm in financial distress may have a market value that is __________ than the face value at maturity.

Ordinary annuity

The first payment occurs at the end of the period

- Coupon rate - Time to maturity

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

time to maturity and coupon rate

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

false

True or false: A debenture is a bond secured with collateral. True false question.

True

True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.

True

True or false: Low-grade bonds are rated below investment grade by the major rating agencies.

false

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.

The firm is in a strong position to meet its debt obligations.

What does the AAA rating assigned by S&P mean?

A bond that sells for more than its face amount

What is a premium bond?

$1000

What is the assumed par value when none is given?

It is the number of years until the face value is paid off.

What is the definition of a bond's time to maturity?

Coupon rate * par

What is the equation for payment?

increase

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows __________

decrease

When interest rates in the market rise, we can expect the price of bonds to _____.

Upward sloping

When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?

- The repayment arrangements - The total amount of bonds issued

Which of the following are usually included in a bond's indenture?

discount

_________ bonds are bonds that sell for less than the face value.

Par value

a bond's stated value, to be paid to the bondholder at maturity

bond price decreases

as Interest rate increases -->

bond price increases

as interest rate decreases

Annuity due

first payment occurs at the beginning of the period