BFIN Ch 6 SB
What is the asked price
It is the price at which a dealer is willing to sell a particular security. It is the price at which an investor can buy a particular security from a dealer.
A sukuk is a contract that is related to
riba. Islamic law
The degree of interest rate risk depends on _____
the sensitivity of the bond's price to interest rate changes
Most of the time, a floating-rate bond's coupon adjusts
with a lag to some base rate
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.
What is the bid price?
It is the price an investor will receive if he or she sells a bond to a dealer. It is the price at which a dealer is willing to buy securities.
Equity represents a(n) ______ interest of a firm
Ownership
What are the cash flows involved in the purchase of a five-year zero coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent
Pay $800 today and receive $1,000 at the end of five years
What are the two major forms of long-term debt?
Public and private issues
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 =
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher.
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.
The U.S. government borrows money by issuing ______
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
True or false: The government sells Treasury notes and bonds to the public every month.
True
It is the duty of the bond _____ to manage the sinking fund so that bonds can be repaid
Trustee
Which of the following are bonds that have actually been issued?
a put bond a convertible bond a CoCo bond
Which of the following terms apply to a bond?
coupon rate par value time to maturity
The bid-ask spread represents the ____
dealer's profit
The nominal rate is found by adding the ______ and the real rate of return
inflation
A corporate bond's yield to maturity
is usually not the same as a bond's coupon rate. changes over time.
A zero coupon bond is a bond that ______
makes no interest payments
Which one of the following is the most important source of risk from owning bonds
market interest rate fluctuations
The term structure of interest rates examines the _______
relationship between short-term and long-term interest rates
What are the three components that influence the Treasury yield curve?
the real rate of return expected future inflation the interest rate risk premium
Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields
default risk premium liquidity premium
A key difference between interest payments and dividend payments is
dividends are not tax deductible. interest is tax deductible.
What is the purpose of a sinking fund?
to create a fund to repay bonds when they fall due
True or false: Long-term debt has maturities greater than one year
true
A Sukuk is in compliance with Islamic law as the financing instrument is not charging any ______ or making money from money
Interest
Which of the following are true of bonds?
They are issued by both corporations and governments. They are normally interest-only loans.
True or false: Current yield = Annual coupon payment/Price
True
Why is the bond market less transparent than the stock market? Multiple choice question.
Many bond transactions are negotiated privately.
What are some features of the OTC market for bonds
OTC dealers are connected electronically. The OTC has no designated physical location.
What is a corporate bond's yield to maturity (YTM)?
YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features
What does a bond's rating reflect?
the ability of the firm to repay its debt and interest on time
Bond ratings are based on the probability of default risk, which is the risk that
the bond's issuer may not be able to make all the required payments
The coupon payments on floating-rate bonds are _____.
Adjustable
Which of the following is not a difference between debt and equity
Equity is publicly traded, while debt is not.
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.
