Week 8

Which of the following are usually included in a bond's indenture? The repayment arrangements The details of previous bond issues The total amount of bonds issued The names of the bondholders

The repayment arrangements The total amount of bonds issued

Which of the following are bonds that have actually been issued? a silent bond a convertible bond a CoCo bond a put bond a bunt-n-run bond

a convertible bond a CoCo bond a put bond

The coupon payments on floating-rate bonds are _____. fixed adjustable very low very high

adjustable

A key difference between interest payments and dividend payments is? dividends are not tax deductible dividends are tax deductible interest is tax deductible interest is not tax deductible

dividends are not tax deductible interest is tax deductible

A zero-coupon bond is a bond that ____. produces no taxable income is sold at a premium makes no interest payments has no market value

makes no interest payments

Equity represents a(n) _____ interest of a firm.

ownership

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

Current yield = Annual coupon payment/Price

Most of the time, a floating-rate bond's coupon adjusts ____. with a lead to some base rate with a lag to some base rate on a continual basis dramatically

with a lag to some base rate

Bond ratings are based on the probability of default risk, which is the risk that ___. inflation may increase in the short term the bond's maturity may change the bond's issuer may not be able make all the required payments the bond's interest rates may change unexpectedly

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

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

Changes in interest rates cause changes in bond prices.

What is a real rate of return? It is a percentage change in buying power. It is a rate of return that has been adjusted for inflation. 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 percentage change in buying power. It is a rate of return that has been adjusted for inflation.

What is the bid price? It is the highest price at which bonds can be bought. It is the price an investor will receive if he sells a bond to a dealer. It is the price at which a dealer is willing to sell securities. It is the price at which a dealer is willing to buy securities.

It is the price an investor will receive if he sells a bond to a dealer. It is the price at which a dealer is willing to buy securities.

What is the asked price? It is the price at which a dealer is willing to buy a particular security. 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. It is the percentage change in a bond's price since its issue.

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.

Why is the bond market less transparent than the stock market? The bond market is bigger than the stock market. Many bond transactions are negotiated privately. The press does not adequately cover the bond market. The bond market is not subject to any regulations.

Many bond transactions are negotiated privately.

Which of the following terms apply to a bond? Dividend yield Par value Coupon rate Time to maturity

Par value Coupon rate Time to maturity

What does historical data suggest about the nature of short-term and long-term interest rates? Short-term rates are always higher than long-term rates. Short-term rates are equal to the long-term rates. Long-term rates are always higher than short-term rates. Sometimes short-term rates are higher and sometimes long-term rates are higher

Sometimes short-term rates are higher and sometimes long-term rates are higher.

What does a bond's rating reflect? The ability of the firm to repay its debt and interest on time The number of bonds issued by the corporation since its IPO The debt-equity ratio for the current year The quality of the bond relative to its competitors

The ability of the firm to repay its debt and interest on time

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

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

True or false: The government sells Treasury notes and bonds to the public every month.

True

The US government borrows money by issuing: Treasury pass-through certificates Treasury notes Treasury bonds

Treasury notes Treasury bonds

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

True

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________. callback provision refunding provision recall allowance call provision

call provision

A corporate bond's yield to maturity: is alway equal to a bond's coupon rate changes over time remains fixed over the life of the bond is usually not the same as a bond's coupon rate

changes over time is usually not the same as a bond's coupon rate

A part of the indenture limiting certain actions during the term of the loan are termed ________. protective covenants bond protections bond restrictions indenture restrictions

protective covenants

What are the two major forms of long-term debt? Canadian debt debentures public issue private issue

public issue private issue

The term structure of interest rates examines the ____. relationship between short-term and long-term interest rates relationship between par value and market price relationship between coupon rates and market yield changes in bond values over time

relationship between short-term and long-term interest rates

The term structure of interest rates describes ________. the relationship between nominal rates of interest and inflation the pure time value of money the relationship between nominal rates and time to maturity the relationship between rates on corporate bonds and Treasury bonds the relationship between real interest rates and inflation

the pure time value of money the relationship between nominal rates and time to maturity

The degree of interest rate risk depends on ____. how many times the interest rate changes in a year the sensitivity of the bond's price to interest rate changes the sensitivity of the bond's coupon rate to interest rate changes the face value of a bond

the sensitivity of the bond's price to interest rate changes

True or false: Long-term debt has maturities greater than one year

true

What are the three components that influence the Treasury yield curve? The default risk premium Expected future inflation The real rate of return The interest rate risk premium

Expected future inflation The real rate of return The interest rate risk premium

What are some features of the OTC market for bonds? OTC dealers are connected electronically. The OTC has no designated physical location. Dealers are restricted geographically to be in the U.S.

OTC dealers are connected electronically. The OTC has no designated physical location.

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

Equity is publicly traded while debt is not