CH 6 (finc mgmt)

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.

The term structure of interest rates examines the

relationship between short-term and long-term interest rates

What is a real rate of return?

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

Which of the following are features of municipal bonds?

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

Which of the following are true of bonds?

- They are normally interest-only loans. - They are issued by both corporations and governments.

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?

- Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. - Treasury bonds are issued by the U.S. government, while corporate bonds are issued by corporations. - Treasury bonds are considered free of default risk, while corporate bonds are exposed to default risk.

What are the two unique features of a U.S. federal government bond?

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

The term structure of interest rates describes

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

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 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

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.

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations.

Which one of the following is the most important source of risk from owning bonds?

market interest rate fluctuations

Bonds issued by state and local governments are called

municipal bonds

What are municipal bonds?

bonds that have been issued by state or local governments

When interest rates in the market rise, we can expect the price of bonds to

decrease

A bond with a BB rating has a Blank______ than a bond with a BBB rating.

higher risk of default

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows

increases

The nominal rate is found by adding the Blank______ and the real rate of return.

inflation

A zero coupon bond is a bond that

makes no interest payments

The degree of interest rate risk depends on

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

Which of the following terms apply to a bond?

time to maturity par value coupon rate