Bonds

A zero coupon bond is a bond that ____.

makes no interest payments

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

Which of the following terms apply to a bond?

Time to maturity Par value Coupon rate

True or false: Equity represents an ownership interest.

True

A bond's ____ rate is the stated interest payment made on a bond.

coupon

In general, a corporate bond's coupon rate ____,

is fixed until the bond matures

A corporate bond's yield to maturity ____.

changes over time can be greater than, equal to, or less than the bond's coupon rate

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?

$5,000; Par value is not affected by interest rates, market price, or time.

What are the cash flows involved in the purchase of a 5-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 5 years; a zero coupon bond pays no coupon interest. The cash flows are just the purchase today and the repayment of par value in 5 years.

A bond's ____ is the number of years until the face value is due to be repaid.

maturity

Which of the following are true about a bond's face value?

It is also known as the par value. It is the principal amount repaid at maturity.

What is the definition of a bond's time to maturity?

It is the number of years until the face value is due to be repaid.

What is an interest-only loan?

It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?

10%; Coupon rate = $100/$1,000 = .10, or 10%

What is a corporate bond's yield to maturity (YTM)?

YTM is the prevailing market interest rate for bonds with similar features. YTM is the expected return for an investor who buys the bond today and holds it to maturity.