FINAN 450 Chp 7 Smartbook

A bond pays annual interest payments of $50, has a par value of $1000, and a market price of $1200. How is the coupon rate computed? - $50/[($1000 + 1200)/2] - $50/($1200 - 1000) - $50/$1000 - $50/$1200

$50/$1000

Which one of these correctly specifies the relationship between the nominal rate and the real rate? - (1 + R) = (1 + r) x (1+h) - (1+h) = (1 + R) x (1 + r) - R = r + h - (1 + r) = (1 + R) x (1+ h)

(1 + R) = (1 + r) x (1+h)

Select all that apply What are three important features of Treasury notes and bonds? - Highly liquid - Tax-free - Default-free - Taxable

- Highly liquid - Default-free - Taxable

Select all that apply What are some reasons why the bond market is so big? - Many corporations have multiple bond issues outstanding. - Federal government borrowing activity in the bond market is enormous. - Corporations are required to raise more money from bonds than from stocks. - Various state and local governments also participate in the bond market.

- Many corporations have multiple bond issues outstanding. Federal government borrowing activity in the bond market is enormous. - Various state and local governments also participate in the bond market.

Select all that apply Which of the following are usually included in a bond's indenture? - The bond's rating - The repayment arrangements - The names of the bondholders - The total amount of bonds issued

- The repayment arrangements - The total amount of bonds issued

When the US government wants to borrow money for the long-term (more than one year) it issues: - Treasury notes - Treasury bonds - Treasury stocks - Treasury bills

- Treasury notes - Treasury bonds

In terms of time to maturity, US Treasury notes and bonds have initial maturities ranging from ___ years. - 5 to 25 - 2 to 30 - 5 to 20 - 10 to 30

2 to 30

A bond with exotic features is often called a ___ bond. - Dog - Angel - Bird - Cat

Cat

As an investor in the bond market, why should you be concerned about changes in interest rates? - You shouldn't be as interest rate changes do not affect bonds. - Changes in interest rates lead to changes in the par value of a bond. - Changes in interest rates cause changes in bond prices. - Changes in interest rates change the interest payments on fixed coupon bonds.

Changes in interest rates cause changes in bond prices.

What is a bond's current yield? - Current yield = Annual coupon / Face value - Current yield = Annual coupon payment / Current price - Current yield = Annual coupon / Par value - Current yield = Current price / Face Value

Current yield = Annual coupon payment / Current price

Which of the following is not a difference between debt and equity? - A corporation's interest payments on debt are tax deductible, but the dividends it pays to equity holders are not - Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy - Equity represents ownership interest while debt does not - Equity is publicly traded while debt is not

Equity is publicly traded while debt is not

True or False A bond's value is not affected by changes in the market rate of interest.

FALSE

True or False The real rate of return will generally be higher than the nominal rate of return.

FALSE

A limitation of bond ratings is that they ___. - Focus exclusively on default risk - Focus on both default risk and interest rate risk - Are generated by the issuing corporations, not an external independent agency - Change every day

Focus exclusively on default risk

The federal government can raise money from financial markets to finance its deficits by ___. - Raising taxes - Requesting foreign aid - Issuing bonds - Issuing stocks

Issuing bonds

What is the real rate of return? - It is a percentage change in prices of goods in the economy - It is an average rate of return on similar investments - It is a rate of return that has not been adjusted for inflation - It is a rate of return that has been adjusted for inflation

It is a rate of return that has been adjusted for inflation

Which one of the following is the most important source of risk from owning bonds? - Loss of a bond certificate - Coupon interest rate fluctuations - Market interest rate fluctuations - Mergers

Market interest rate fluctuations

What are the two major forms of long-term debt? - Public issue and privately placed - Indentured and free - Privately placed and unsecured - Current and deferred

Public issue and privately placed

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 discounting at the ___ rate. - Cross - Inflation - Nominal - Real

Real

Within the context of financial markets, complete the following equation: Bid - Ask = ___.

Spread

What is the largest security market in the world in terms of trading volume? - The US derivatives market - The US corporate bond market - The US stock market - The US Treasuries market

The US Treasuries market

Why does a bond's value fluctuate over time? - The coupon rate and par value are fixed, while market interest rates change - A bond's par value changes over time - The coupon rate varies, while market interest rates are fixed - A bond's value does not fluctuate over time

The coupon rate and par value are fixed, while market interest rates change

The Fisher effect decomposes the nominal rate into: - The inflation rate and the real rate - The real rate and the yield to maturity - The inflation rate and the yield to maturity

The inflation rate and the real rate

If you own corporate bonds, you will be concerned about interest rate risk as it affects ___. - The market price of the bonds - The time to maturity - Coupon rates - The par value of the bonds

The market price of the bonds

The main reason it is important to distinguish between debt and equity is that the benefits and risks ___. - Never change - Are similar - Are different

are different

The ___ yield is the bond's annual coupon divided by its price.

current

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

When the term structure of interest rates is downward sloping, ___. - There is no relationship between short-term and long-term rates - Short-term rates are higher than long-term rates - Short-term rates are lower than long-term rates - Short-term rates equal long-term rates

Short-term rates are higher than long-term rates

True or False Equity represents an ownership interest.

TRUE

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

True or False The price you actually pay to purchase a bond will generally exceed the clean price.

TRUE

In general, a corporate bond's coupon rate ___. - Changes in sync with market interest rates - Is fixed until the bond matures - Decreases as a bond nears maturity - Changes every year

is fixed until the bond matures

Select all that apply Which of the six factors determine the yield on a bond? - Voting rights - Default risks - Real rate of return - Expected future inflation - Liquidity - Taxability - Interest rate of return

- Real rate of return - Expected future inflation - Interest rate risk - Default risk - Taxability - Liquidity

Secondary markets in sukuk are extremely illiquid because most sukuk are: - Riskier than other bond issues - Bought and held to maturity - Legally suspect - Subject to religious interpretation

Bought and held to maturity

Which of these risks is addressed by bond ratings? - Call risk - Default risk - Maturity risk - Interest rate risk

Default risk

A zero coupon bond is a bond that ___. - Produces no taxable income - Makes no interest payments - Is sold at a premium - Has no market value

Makes no interest payments

What are the cash flows involved in the purchase of a 5-year zero coupon bond that has a par value of $1000 if the current price is $800? Assume the market rate of interest is 5 percent. - Pay $800 today and receive $1000 at the end of 5 years - Pay $800 today and receive $800 plus $250 at the end of 5 years - Pay $800 today and receive $1250 at the end of 5 years - Pay $800 today, receive $50 every year for 5 years, and receive $1000 at the end of 5 years

Pay $800 today and receive $1000 at the end of 5 years

What does the clean price for a bond represent? - The original issue price - The quoted price plus interest accrued since the last coupon date - The quoted price, which excludes interest accrued since the last coupon date - The original issue price plus interest accrued since the last coupon date

The quoted price, which excludes interest accrued since the last coupon date

Which of the following institutions issue bonds that are traded in the bond market? - The federal government - State governments - Sole proprietorships - Public corporations

- The federal government - State governments - Public corporations

Select all that apply As a general rule, which of the following are true of debt and equity? - The maximum reward for owning debt is fixed - Equity represents an ownership interest - Debt and equity represent the same financial claims - Creditors generally have voting power

- The maximum reward for owning debt is fixed - Equity represents an ownership interest

Select all that apply The US government borrows money by issuing: - Treasury pass-through certificates - Treasury bills - Treasury bonds - Treasury notes

- Treasury bills - Treasury bonds - Treasury notes

What is the coupon rate on a bond that has a par value of $1000, a market value of $1100, and a coupon interest payment of $100 per year? - It will depend on the bond rating for that year - 9.09% - 1% - 10%

10%

Most of the time, a floating-rate bond's coupon adjusts ___. - Dramatically - With a lead to some base rate - On a continual basis - With a lag to some base rate

With a lag to some base rate