Chapter 6: Valuing Bonds

Marley Corporation's bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the yield to maturity is _____. (Use trial and error to calculate yield).

10%

You pay $1,200 for a bond and receive an annual coupon payment of $100. The current yield on the bond is _____.

100/1200 = 8.33%

The __________ on government bonds provide a benchmark for all interest rates.

Interest Rates

A bond that is priced below its face value is said to sell for

a discount

A bond that is priced above its face value is said to sell for

a premium

The current yield on a bond is equal to

annual coupon payment divided by bond price

Governments and corporations borrow money by selling _______ to investors.

bonds

The interest payments to the bondholder are called the

coupon

A bond's _______ is fixed, but the present value is affected by changes in the ________.

coupon payment, interest rate

The _______ is the annual interest payment on a bond, expressed as a percentage of face value.

coupon rate

When the interest rate is lower than the coupon rate on a bond, the price of the bond will be:

higher than face value

The price of a bond can be quoted as a _____ of face value.

percentage

A measure of return that takes account of both coupon payments and change in a bond's value over its life is a standard measure known as

yield to maturity

The discount rate that makes the present value of the bond's payments equal to its price is known as the

yield to maturity

A bond can also be called:

-Note (treasury bonds with maturities of 2-10 yrs at the time of issue) -Debenture (some corporate bonds)

Which of the following sell bonds? -U.S. Treasury -State and local governments -corporations -individuals and households

-U.S Treasury -State and local governments -corporations

An individual invested $1,000 in a bond with a coupon payment of $12. The price of the bond increased to $1,400. What is the rate of return on this bond?

41.2% Rate of return = (coupon income + price change)/investment (12+400)/1000

A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current interest rate of 6%. The bond will sell for

5,000 (because bond coupon = interest rate -> sell for face value)

Mortor's Corporation sold 6 year bonds for $1,072.62, with a face value of $1,000 and a coupon rate of 8%. The annual yield to maturity is

6.5%

The price of a bond is equal to the

PV(coupon) plus PV(face value)

A change in interest rate has the greatest effect on the present value of:

distant cash flows

If the bond's yield to maturity remains unchanged during the period, the bond price changes with time so that the total return on the bond is _____ the yield to maturity.

equal to

When the coupon rate of a bond is equal to the current interest rate, the bond will sell for

face value

The payment made when a bond matures is called the bond's:

face value (also called the principal or par value)

When interest rates rise, bond prices

fall

If interest rates fall, the rate of return on a bond will be _____ the yield to maturity.

greater than

The risk in bond prices due to fluctuations in interest rates is known as

interest rate risk

When the interest rate is higher than a bond's coupon rate, the bond will be priced at:

lower than face value

The total income per period per dollar invested is known as the

rate of return

When interest rates fall, bond prices

rise

The difference between the bid price and the asked price of a bond is the _______.

spread

for bonds priced at face value, the rate of return is:

the coupon rate