finance exam 2

The current yield on a bond is equal to: current interest rate divided by bond price annual coupon payment divided by bond price the current interest rate the bond rate

annual coupon payment divided by bond price

the difference between the bid price and the price of bond is the _______ a. opportunity cost of capital b. spread c. interest rate d. inflation rate

b

bonds are defined as: a. mortgage securities b. debt securities c. equity securities d. collateral securities

b debt securties

when the coupon rate of a bond is equal to the current interest rate, the bond will sell for: a. more than face value b. face value c. less than face value d. a discount

b face value

the price of a bond can be quoted as the _______ of face value. a. par value b. percentage c. future value d. standard value

b percentage

Governments and corporations borrow money by selling _______ to investors.

bonds

the interest payments to the bondholder are called the: a. face b. par c. coupon d. maturity

c coupon

The purchaser of a bond pays the ______ price, whereas the investor who already owns the bond and sells it receives the ________ price. a. bid, asked. b. bid, spread c. asked, bid d. asked, spread

c. asked, bid

Marley Corporation's bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the yield to maturity is _____. (Use trial and error to calculate yield). 10% 12% 5% 8%

10% First, calculate the coupon payment: $1,000 x .05 = $50. Next, discount the payments at each yield to determine the appropriate yield that gives a bond price of $841.51. You will see that by doing trial and error on the 4 given yields in the multiple choice question (5%, 8%, 10%, and 12%), the correct yield is 10%: $841.51 = $50/(1+.1) + $50/(1+.1)2+ $50/(1+.1)3+ $1,050/(1.1)4

An individual invested $1,000 in a bond with a coupon payment of $12. The price of the bond increased to $1,400. What is the rate of return on this bond? 40% 12% 41.2% 71.4%

41.2

Mortor's Corporation sold 6 year bonds for $1,072.62, with a face value of $1,000 and a coupon rate of 8%. The annual yield to maturity is 7% 6% 7.5% 6.5%

6.5

You pay $1,200 for a bond and receive an annual coupon payment of $100. The current yield on the bond is _____.

7.52% current yield = annual coupon payment/bond price

the price of a bond is equal to the______

PV (coupon) plus PV (face value)

A bond's _______ is fixed, but the present value is affected by changes in the ________. coupon payment, interest rate interest rate, coupon payment

coupon payment, interest rate

The _______ is the annual interest payment on a bond, expressed as a percentage of face value. bond yield coupon rate dealer spread interest rate

coupon rate

A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current interest rate of 6%. The bond will sell for: a. $4,998 b. $5,020 c. $4,980 d. $5,000

d

The payment made when a bond matures is called the bond's: end value coupon value face value personal value

face value

when interest rates rise, bond prices rise fall stay the same

fall

when the interest rate is lower than the coupon rate on a bond, the price of the bond will be face value less than fv higher than fv

higher than fv

the return on a bond that sells at a premium is ( greater or less ) than the current yield.

less

When the interest rate is higher than a bond's coupon rate, the bond will be priced at: face value more than face value less than face value

less than face value

bond also known as:

note, debenture

The total income per period per dollar invested is known as the: bond's rate current yield yield to maturity rate of return

rate of return

when interest rates fall, bond prices

rise

The discount rate that makes the present value of the bond's payments equal to its price is known as the current rate of interest yield to maturity current yield bond rate

yield to maturity