Chapter 6 Interest rate and bond valuation

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

A corporation issues 50000 bonds at a face value of 1000 each. The bonds mature in 5 years and have a coupon rate of 7%. What will the total annual interest expense be for the corporation?

$3.5 million ****不会

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yield?

1. Default risk premium 2. liquidity premium

What is a real rate of return?

1. It is a rate of return that has been adjusted for inflation 2. it is a percentage change in buying power

What are some features of the OTC market for bonds?

1. OTC dealers are connected electronically 2. The OTC has no designated physical location

The US government borrows money by issuing:

1. Treasury bonds 2. Treasury notes

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

1. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer 2. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk 3. Treasury bonds are issued by the US government while corporate bonds are issued by corporations

What are the two unique features of a U.S. federal government bond?

1. US Treasury issues are exempt from state income taxes 2. US Treasury issues are considered to be default-free

Which of the following are the true about a bond's face value？

1. it is also known as the par value 2. it is the principal amount repaid at maturity

What is the asked price?

1. it is the price at which an investor can buy a particular security from a dealer 2. it is the price at which a dealer is willing to sell a particular security

Which of the following are features of municipal bonds?

1. the interest on municipal bonds is, in some cases exempt from state taxes in the state of issue 2. the interest on municipal bonds is exempt from federal taxes 3. they are issued by state and local governments

As a general rule, which of the following are true of debt and equity?

1. the maximum reward for owning debt is fixed 2. equity represents an ownership interest

What are three components that influence the Treasury yield curve?

1. the real rate of return 2. the interest rate risk premium 3. expected future inflation

The term structure of interest rates describes _______

1. the relationship between nominal rates and time to maturity 2. the pure time value of money

Which of the following are usually included in bond's indenture?

1. the repayment arrangements 2. the total amount of bonds issued

Which of the following are true of bonds?

1. they are normally interest-only loans 2. they are issued by both corporations and governments

Which three of the following are common shapes for the term structure of interest rates?

1. upward sloping 2. downward sloping 3. humped

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

11.11% ** (.10*1000)/900

What are municipal bonds?

Bonds that have been issued by state or local governments

What are "fallen angel" bonds?

Bonds that have dropped from investment grade to junk bond status

What is a bond's current yield?

Current yield = annual coupon payment / current price

What is a discount bond?

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

What does a Treasury yield curve show?

It shows the yield for different maturities of Treasury notes and bonds

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

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 rate risk, all other things being risk?

The bond with a 5% coupon rate*

What does the AAA rating assigned by S&P mean?

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

If bonds for AT&T are quoted at 115, they can be purchased:

at 115% of par value plus accrued interest

What is the definition of a bond's time to maturity?

it is the number of years until the face value is paid off

Equity represents a ______ interest of a firm

ownership

The term structure of interest rates examines the ____

relationship between short-term and long-term interest rates