Finance Exam 3

The coupon payments on floating-rate bonds are _____.

adjustable

If bonds for AT&T are quoted at 115, they can be purchased:

at 115% of par value plus accrued interest

The bid-ask spread represents the ___.

dealer's profit

Bonds issued by state and local governments are called _______ ______.

municipal bonds

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.

True

What does the dirty price represent?

It includes the quoted price and accrued interest

What is a bond's accrued interest?

It is interest that has been earned but not yet received by the current bondholder

What is the asked price?

It is the price at which an investor can buy a particular security from a dealer; it is the price at which a dealer is willing to sell a particular security

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate

R = r + h

The relationship between nominal rates, real rates and inflation is called ________ .

The Fisher Effect

What does the clean price for a bond represent?

The quoted price excluding accrued interest

Which of the following are features of municipal bonds? They are issued by state and local governments. The interest on municipal bonds is exempt from federal taxes. They are not subject to default risk. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue. The interest on municipal bonds is always exempt from state taxes.

They are issued by state and local governments. The interest on municipal bonds is exempt from federal taxes. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue.

True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.

True

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

True

If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____.

at 99.5 percent of face value plus any accrued interest

A zero-coupon bond is a bond that ____.

makes no interest payments

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate

Why is the bond market less transparent than the stock market?

Many bond transactions are negotiated privately.

What are the two unique features of a U.S. federal government bond? U.S. Treasury issues are exempt from federal income taxes. U.S. Treasury issues are exempt from state and federal income taxes. Reason: U.S. Treasury issues are not exempt from federal income taxes. U.S. Treasury issues are exempt from state income taxes. U.S. Treasury issues are considered to be default-free.

U.S. Treasury issues are exempt from state income taxes. U.S. Treasury issues are considered to be default-free.