CH 9 Extra Credit

A zero-coupon bond pays no interest payments to the bondholder. It has a $1,000 par value and matures in 5 years. What is the value of this bond if the market rate of interest on similar risk bonds is 10%?

N= 5 I= 10% PMT= 0 FV= 1,000 **PV= 620.92

What is the yield to maturity (YTM) for a $1,000 par value bond selling for $1,100 that matures in 5 years and pays a 10% coupon one time a year?

N= 5 PV= 1,100 PMT= 100 (10% * 1,000) FV= 1,000 **I= 7.5%

What is the value of a $1,000 par value 6% coupon bond with 7 years remaining to maturity assuming annual coupon payments and a market rate of 9% on similar risk bonds?

N= 7 I= 9 PMT= 60 (6% * 1,000) FV= 1000 **PV= $849.01

What is the yield to maturity on a zero coupon bond currently selling for $547.32 that has a $1,000 par value and will mature in 8 years?

N= 8 PMT= 0 PV= (527.32) FV= 1,000 **YTM/I= 8.33%

Which of the following is one of the top three bond rating firms?

Standard and Poor's

A bond will sell at _____ if the required return is greater than the coupon rate.

a discount

In the event a firm goes bankrupt, an investment grade senior debenture bond is more likely to receive liquidation proceeds than:

a subordinated debenture

Credit risk, or default risk, is the risk that:

bond interest payments or the principle payment will not be made.

Bonds are often as a ________, which makes an adjustment by reducing the price by the amount of any accrued interest.

clean price

The present value of a bond's ______ determines value of the bond.

coupon payment and maturity value

Corporations can issue fixed rate debt where the interest rate, or _______, is expressed as a percentage of the bond's ______ .

coupon rate, par value

A market interest rates increase, the value of a bond will _______ all other things equal.

decrease

Investors, analysts and managers often use the yield curve to:

forecast interest rates

The risk-free rate of interest is used in a number of financial models. The best approximation for the risk-free rate is:

short-term U.S. Treasuries

Subordinated debentures are:

unsecured bonds with a junior claim on assets

Cambridge State Bank is paying 7% interest on its one-year certificates of deposit. If the inflation rate is 4%, which of the following is the best approximation for the real rate of interest that Cambridge State Bank is paying?

.07-.04= .03 (3%)

What is the market price of a $1,000 face value bond quoted at 97.5%?

1000 * .975 = $975

Interest rate risk and the time to maturity have a relationship that is best described as:

Direct

All other things equal, a corporation will pay a ________ coupon rate on ________ bonds.

higher, higher risk

A steeply upward-sloping yield curve indicates that:

interest rates are expected to rise in the future

The term structure of interest rates refers to the different:

interest rates of securities with the same risk but different maturity dates

The top four categories of bond ratings are collectively known as _________

investment-grade bonds

Titan State Bank offers to pay you 6% interest, compounded quarterly. The 6% interest rate is known as the:

nominal interest rate

A yield curve can be constructed using similar risk corporate bonds. The yield curve constructed with corporate bonds will _______ the U.S. Treasury yield curve.

plot above

The ______ is a graphical representation of the term structure of interest rates.

yield curve