CH. 7
The longer the term, _______ (smaller/greater) the interest rate sensitivity.
Greater
Longer-term bonds have _____ (smaller/greater) interest rate sensitivity because a _____ (smaller/larger) portion of a bond's value comes from the face amount.
Greater; Larger
If a $1,000 par value bond is trading at a premium, the bond is _____.
trading for more than $1,000 in the market
What are the two major forms of long-term debt?
Public issue and privately placed
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond
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 ____.
$1,220
What is a premium bond?
A bond that sells for more than face value
Which of these are required to calculate the current value of a bond?
Applicable market rate Par value Coupon rate Time remaining to maturity
Which of the following variables are required to calculate the value of a bond?
Coupon rate & Issue price of the bond
Which of these are required to calculate the current value of a bond?
Coupon rate, Par value, & Applicable market rate
What is a bond's current yield?
Current yield = Annual coupon payment/Current price
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
Which of the following variables are required to calculate the value of a bond?
Market yield Coupon rate Remaining life of bond
Which of the following variables are required to calculate the value of a bond?
Market yield Remaining life of bond Coupon rate
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change
Which of the following are usually included in a bond's indenture?
The repayment arrangements AND The total amount of bonds issued
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 is a corporate bond's yield to maturity (YTM)?
YTM is the prevailing market interest rate for bonds with similar features. AND YTM is the expected return for an investor who buys the bond today and holds it to maturity.
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.
A bond's YTM will exceed its current yield when the bond is selling at ____.
a discount
The main reason it is important to distinguish between debt and equity is that the benefits and risks _____.
are different
When a corporation or government wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities that are generically called ______.
bonds
A _____ provision allows the company to repurchase or "_____" part or all of the bond issue at stated prices over a specified period.
call; call
A corporate bond's yield to maturity ____.
can be greater than, equal to, or less than the bond's coupon rate AND changes over time
A corporate bond's yield to maturity ____.
changes over time AND can be greater than, equal to, or less than the bond's coupon rate
The _____ yield is the bond's annual coupon divided by its price.
current
The written agreement between the corporation and the lender detailing the terms of the debt issue is the _____.
indenture
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.
interest earnings only
The relationship between bond prices and the market rate of interest is ____.
inverse; if the market rate of interest rises, bond prices will fall
In general, a corporate bond's coupon rate ____,
is fixed until the bond matures
The federal government can raise money from financial markets to finance its deficits by ___.
issuing bonds
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
The reason that interest rate risk is greater for Blank______ term bonds than for Blank______ term bonds is that the change in rates has a greater effect on the present value of the Blank______ than on the present value of the Blank______.
long; short; face value; coupon payments
Protective covenants are classified into two types: _____ and _____ covenants.
negative AND positive
The two major forms of long-term debt are _____ issue and privately placed.
public
If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.
the market price of the bonds
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?
$950
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%
Which of the following is true about interest rate risk?
All else equal, the longer the time to maturity, the greater the interest rate risk. AND All else equal, the lower the coupon rate, the greater the interest rate risk.
Which of the following is true about interest rate risk?
All else equal, the lower the coupon rate, the greater the interest rate risk. AND All else equal, the longer the time to maturity, the greater the interest rate risk.
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices.
What is a discount bond?
Discount bonds are bonds that sell for less than the face value.
Which of the following is not a difference between debt and equity?
Equity is publicly traded while debt is not
As a general rule, which of the following are true of debt and equity?
Equity represents an ownership interest The maximum reward for owning debt is fixed
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
True or false: A bond's value is not affected by changes in the market rate of interest.
False
You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
The bond with the 5 percent coupon rate is more sensitive.
