Ch. 7 Smart Connect Conceptual HW Questions FIN 3403 FSU

In order of security as defined in the US

- 1) Mortgage bonds - 2)Debentures.

The US government borrows money by issuing:

-Treasury notes -Treasury bills -Treasury bonds.

If you invest in a corporate bond, how many times can you expect, in general, to receive interest?

-Twice a year.

Difference between a zero coupon bond & conventional bond?

Zero coupon bonds are always issued at a discount. -Zero coupon bonds make no interest payments.

What is required to calculate the current value of a bond?

-Applicable market rate -Coupon rate -Par Value -Time remaining to maturity

Structured note

-Based on financial securities commodities, or currencies.

Convertible bond

-Can be exchanged for shares of stock.

Institutions that issue bonds that are traded in the bond market?

-Public Corporations -The Federal Government -State Governments

If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your income tax bracket increases from 15% to 20%. Assume there are no state or local taxes.

- (0%) -*Interest income from munis is exempt from federal income tax.

The liquidity Premium compensates investors based on a bond's _____?

- Degree of marketability.

The amount by which the call price exceeds the par value of the bond is called:

Call Premium

Not a difference between debt and equity?

-Equity is publicly traded while debt is not.

A bond with a BBB rating has a _______ than a bond with an A rating.

-Higher risk of default.

A humped term structure of interest rates indicates that interest rates are expected to _______as the time to maturity increases

-Increase and then decline

In General a corporate bond's coupon rate______?

-Is fixed until the bond matures.

What is a real rate of return?

-It is a rate of return that has been adjusted for inflation.

Bond's Face Value:

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

Variables required to calculate the value of a bond?

-Remaining life of bond -Market yield -Coupon rate

Which has a higher value, the bid price quote or the asked price quote?

-The asked price quote is higher.

Which two prices can be found in the "Wall Street Journal's" daily Treasury bond listing?

-The asked price. -The bid price.

Common Protective Covenants

-The firm cannot merge with any other firm. -The firm must maintain working capital at or above a specified level. -The firm must limit dividends to equity holders.

Features of a municipal bond:

-The interest on municipal bonds is exempt from federal taxes. -They are issued by state and local governments.

What is the bid price?

-The price at which a dealer is willing to buy securities.

What is the asked price?

-The price at which a dealer is willing to sell.

How does the real rate of return differ from the nominal rate of return?

-The real rate of return removes the effect of inflation from the nominal rate.

Which of the following are usually included in a bonds indenture?

-The repayment arrangements. -The total amount of bonds issued.

The degree of interest rate risk depends on_____?

-The sensitivity of the bond's price to interest rate changes.

If a $1000 par value bond is trading at a premium, the bond is:

-Trading for more than $1000 in the market.

When the US government wants to borrow money for the short-term(less than one year) it issues:

-Treasury bills

When the US government wants to borrow money for the long-term(more than one year) it issues:

-Treasury bonds -Treasury notes

Junk bonds typically feature:

-Less than investment-grade rating. -High probability of default.

Which three components determine the shape of the term structure of interest rates?

-Real interest rate -Inflation premium -Interest rate risk premium

Truth about a multi-year typical bond's coupon?

- It is a fixed annuity payment.

ABC Co. issued 1 million 6 % annual coupon bonds that mature in 10 years. The face value is $1000 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.

What is the effective annual rate on a bond with a yield to maturity of 6% that pays semiannual interest?

-(6.09%)

A corporate bond's yield to maturity ______.

-Can be greater than, equal to, or less than the bond's coupon rate. -Changes over time.

Terms that apply to a bond:

-Coupon rate -Time to maturity -Par value

What is included in the calculation of a bond's yield to maturity?

-Current price -Coupon rate -Par Value

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

-Decrease

What risk is addressed by bond ratings?

-Default risk.

Three important features of Treasury Notes & Bonds:

-Default-free -Taxable -Highly Liquid

What is a discount bond?

-Discount bonds are bonds that sell for less than the face value.

Common shapes for the term structure of interest rates?

-Downward Sloping. -Upward Sloping. -Humped.

What is the nominal rate of return on an investment?

-It is the actual percentage (%) change in the dollar value of an investment.

The definition of a bonds time to maturity?

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

A market is considered transparent if ________.

-Its prices and trading volume are easily observed.

How is APR computed?

-APR = (Rate per period) x (Number of periods per year)

Why is the bond market less transparent than the stock market?

-Many bond transactions are negotiated privately.

Put bond

-Owner can force issuer to repay prior to maturity at a stated price.

CAT bond

-Protect insurance companies from natural disasters.

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 _____.

- $1220 - (TVB) Total Value of a Bond (Formula) * TVB = ( Present value of interest payments on bond + Present value of the par value to be paid at maturity )

What is the current yield on a $1000 par value bond that sells for $900 if the coupon rate is 10 % ?

- ( 11. 11 %) - Formula: Current Yield = { ( Coupon Rate x Par Value of Bond ) / (Selling price of bond) }

In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from _________ years.

- (2 to 30)

Secondary markets in sukuk are extremely illiquid because most sukuk are:

- Bought and held to maturity.

Why does a bond's value fluctuate over time?

-The coupon rate and par value are fixed, while the market interest rates changes.

What does AAA rating assigned by S&P mean?

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

A Bond's Indenture typically includes:

-The total amount of bonds issued. -The repayment arrangements.

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

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

YTM Steps in calculator

N - number of years x number of payout amounts per year(annual, semi annual, quarterly, etc. ) I/Y - ? (YTM) PV - Current bond price PMT - Coupon payout { (Interest Payout Rate) x (Par Value / Number of payout amounts per year) } **After calculating for I/Y multiply by 2, number of payout amounts per year.

What will happen to the default risk premium during the periods of economic uncertainty?

-It will increase.

If you are in the 15 % tax bracket, what will be your after tax yield on a U.S. Treasury bond that is currently priced at par and yielding 5 % ?

- (4. 25 %) -Formula : After Tax Yield = { (Current yield %) x ( 1 - Tax bracket %) }

A bonds' yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ____.

- Interest earnings only.