ch.5

What is true about WMT bond quote

- issue price is 996.94 - coupon rate is 3.7%

The nominal rate differs from the real rate of interest, r* as a result of two factors:

Inflationary expectations reflected in an inflation premium (IP) issuer and issue characteristics such as default risks and contractual provisions as reflected in a risk premium (RP)

The yield is what we would consider to be the interest rate if we take the price as the present value, the coupon payments as the payments, and the face value as the future value.

t

match

the spread the difference in yields default spread The difference between two bonds that are similar except for their level of risk term spread the difference between two bonds with the same level of risk but different maturities

What are the features of the US Treasury?

the yields on US treasuries are commonly used as a benchmark in order to evaluate the impact of risk on other bonds no risk of default US treasury bond will have a higher price and lower yield than the corporate bond if they have the same time to maturity They can have risk arising from other sources, such as politics, inflation, changing interest rates, taxes, and liquidity

Bond's principal amount is repaid at maturity

true

Match those following concepts about interest rates

-The term interest rate is usually applied to: debt instruments such as bank loans or bonds; the compensation paid by the borrower of funds to the lender; from the borrower's point of view, the cost of borrowing funds -The term required return is usually applied to equity instruments such as common stock; the cost of funds obtained by selling an ownership interest. -The real risk-free rate of interest is the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation -!Inflation measures the growth rate in the prices of most goods and services over some period of time (monthly, quarterly, annually, or longer) -Real interest rate When an interest rate is adjusted for inflation

prob mastery q 1-5

1. Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?- 50$ 2. Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk- 0 coupon bond 3. What happens to the price of a three-year annual coupon paying bond with an 8% coupon when interest rates change from 8% to 7.24%? Answer in dollar terms to the nearest decimals without the $ sign. Use a "-" sign to denote a price decrease. Do not use a "+" sign.- 19.86 4. The discount rate that makes the present value of a bond's payments equal to its price is termed the: YTM 5. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?- 927.9

If the yield is 10%, the coupon rate is 7%, and the price is $750 then how many years are there until maturity?

18.80

Assume that there is an annual coupon paying bond on the market priced at $850 and that the bond comes with a face value of $1,000. The coupon rate for the bond is 15% and the bond will reach maturity in 7 years.

19.05

Calculate Corporate bond yield if Muni bond yield is 15% and tax rate is 32%

22.06

prob mast 6-10

6. Which of the following statements best describes the real interest rate?- neg, 0 or pos 7. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? Answer in percentage terms to 2 decimals and without the % sign- 5 8. What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $1,117.86? In % terms to 2 decimal places without the % sign.- 5.37 9. A corporate bond with a 6% coupon (paid semiannually) has a yield to maturity of 7.5%. The bond matures in 20 years but is callable at $1050 in ten years. The maturity value is par. Calculate the bond's yield to call. % terms w/o $ sign. (HINT: Find the current price and then solve for YTC.)- 8.66 10. Cornerstone Industries has a bond outstanding that has a 5% coupon rate, $1,000 face value, and a market price of $897.34. If the bond matures in 5 years and interest is paid on a semi-annual basis, what is the yield to maturity on the bond? % format to 2 decimal places - no % sign- 7.5

Calculate bond price if the coupon payment is 9%, yield for the bond is 11%, bond's face value is 1,000 and matures in 4, if paid semi-annually

936.65

Calculate the annual coupon payment if the semi-annual coupon paying bond price is $1,140, the yield for the bond is 5%, the bond's face value is $1,000 and matures in 16 years.

???

match

Discount Bond bond that is issued for less than its par—or face—value Premium Bond bond trading above its face value or in other words Par-value bond bond price that equals the face value

match theories

Expectations theory theory that the yield curve reflects investor expectations about future interest rates Liquidity preference theory long-term rates are generally higher than short-term rates because investors perceive short-term investments to be more liquid and less risky than long-term investments Market segmentation theory market for loans is segmented on the basis of maturity and that the supply of and demand for loans within each segment determine its prevailing interest rate

match concepts

Maturity date the date on which the principal amount of a bond becomes due. On this date, which is generally printed on the certificate of the instrument in question, the principal investment is repaid to the investor, while the interest payments that were regularly paid out during the life of the bond, cease to roll in. Coupon rate The interest payments based on face value Face Value Par value, or the principal amount to be paid at maturity,

What are the bond's features?

The principal amount is repaid at maturity Bonds give no ownership rights to their owners securities that generally make fixed interest payments for a fixed number of time periods

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Zero-coupon bonds bonds have no coupon payments Collateral when there are specific assets that are designated as security for a bond Sinking fund when there is a bank account that holds the cash to be used to make a bond's payments Seniority there is a specific ordering to which bonds get paid first from a firm's cash and which ones get paid last Callable the issuer can repurchase the bond at some fixed price Convertible the bondholder can exchange the bond for some other security, usually stock

A bond has a coupon rate of 8% and matures in 10 years. What are its expected cash flows if this bonds have a principal amount of $1000 and pay interest semi-annually

co1- 40 frequency- 20 co20- 1040

The risk of default for bond means the bond buyer fails to make interest or principal payments

f

municipal bonds or "munis" are risk-free

f

Who can issue munis?

highway authorities, school districts, universities, airports, or public utilities any branch of a state, county city government