Ch. 6 FNAN 300
What will your aftertax yield be on a corporate bond that is currently priced to yield 7% if you are in the 25 percent tax bracket?
5.25%
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ____________.
900+320=$1,220
What is a premium bond?
A bond that sells for more than face value.
A bond's coupon payment is:
A fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
The sensitivity of a bond's price to interest rate change is dependent on which of the following two variables? Bond rating Coupon Rate Par Value Time to maturity
Coupon Rate Time to Maturity
If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is _________ $1,000.
Less than
Which of the following are true of Bonds? Bond Principal does not have to be repaid. They are normally interest-only loans. They are issued by both corporations and governments.
They are interest only loans They are issued by both corporations and governments
If bonds for AT&T are quoted at 115, they can be purchased:
at 115% of par value plus accrued interest.
Which of the following are usually included in a bond's indenture? The details of previous bond issues. The repayment arrangements. 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 put bond -a CoCo bond -a convertible bond
Suppose a bond's clean price is $1,050, and the bond currently has accrued interest of $30. What is the dirty price?
1,050 + 30=$1,080
If a bond is selling at a discount from its par value, the YTM must be ____________ the coupon rate.
Greater than.
Equity represents a(n) __________ interest of a firm.
Ownership
What four variables are required to calculate the value of a bond? -time remaining to maturity -par value -price at the time of bond issue -coupon rate -yield to maturity
Par value Coupon rate Time remaining to maturity Yield to maturity
What is a bond's current yield?
Current yield = annual coupon payment / current price
True or False: In general, the price that is paid for a bond will exceed its quoted price?
True.
A limitation of bond ratings is that they ____________.
focus exclusively on default risk
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?
Coupon Rate=$100/$1000= 10%
True or False: The price you actually pay to purchase a bond will generally exceed the clean price.
True.
If you are holding two bonds- one with a 5% coupon rate and other with a 8% coupon rate, which one is more sensitive to interest rat risk, all other things being equal?
The bond with a 5% coupon rate.
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
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
$60 in interest at the end of each year for 10 years and a $1000 repayment of principal at the end of 10 years
When interest rates in the market rise, we can expect the price of bonds to _______.
Decrease
What is the definition of a bond's time to maturity?
It is the number of years until the face value is paid off
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.
A bond with a BB rating has a __________ than a bond with an BBB rating.
higher risk of default.
Which of the following are true about bond's face value? It is also known as the par value. It is the principal amount repaid at maturity. It is the market value of the bond at the time of maturity. A bond's face value is the same for all corporations.
-It is also known as the par value -It is the principal amount repaid at maturity
What is the bid price?
-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 are some features of the OTC market for bonds?
-OTC dealers are connected electronically -The OTC has no designated physical location
What are the two major forms of long-term debt?
-Public Issue -Private Issue.
The US government borrows money by issuing:
-Treasury bonds -Treasury notes.
What are "fallen angel" bonds?
Bonds that have both an investment grade and a junk bond rating
What are crossover bonds?
Bonds that have both an investment grade and a junk bond rating
True or False: A debenture is a bond secured with collateral.
False.
What is a bond's accrued interest?
It is the interest that has been earned but not yet received by current bondholder.
What does a bond's rating reflect?
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? Creditors generally have voting power. Equity represents an ownership interest. Debt and equity represent the same financial claims. The maximum reward for owning debt is fixed.
The maximum reward for owning debt is fixed Equity represents an ownership interest
Junk bonds have the following features:
They are rated below investment grade bonds
The degree of interest rate risk depends on _________.
the sensitivity of the bond's price to interest rate changes
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 in exempt from federal taxes
What are the two unique features of a U.S. federal government bond?
-US Treasury issues are considered to be default free -US Treasury issues are exempt from state income taxes
Which type of debt is given preference in the event of default ?
Senior.
