Chapter 7 LearnSmart
Which of the following are true about a bond's face value?
It is the principal amount repaid at maturity. It is also known as the par value.
What is the nominal rate of return on an investment?
It is the rate that has not been adjusted for inflation.
What is an interest-only loan?
It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.
All junk bonds typically have which of these features?
Less than investment-grade rating. High probability of default.
What information is needed to compute a bond's yield-to-maturity?
The bond's current price Coupon rate Time to maturity
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rate change
Why did Disney issue 100-year bonds, dubbed "Sleeping Beauty" bonds, in the 1990s?
To lock-in historically low interest rates for a long time
How is a zero coupon bond different from a conventional bond?
Zero coupon bonds are always issued at a discount. Zero coupon makes no interest payments.
A corporate bond's yield to maturity_________.
can be greater than, equal to, or less than the bond's coupon rate changes over time
When interest rates in the market rise, we can expect the price of bonds to ________.
decrease
Assume you own a bond currently valued at $989. If the market rate of interest drops, the bond's current market value will _______.
increase
As the maturity of a bond increase, the interest rate risk _________.
increases at a decreasing rate
A market is considered transparent if _________.
its prices and trading volume are easily observed
Which of the following terms apply to a bond?
Time to maturity Par value Coupon rate
Assume a bond has a $1,000 par value, a coupon rate of 6 percent, annual interest payments, and 7 years to maturity. If the yield on similar bonds is 8 percent, what is the current market value of this bond?
$895.87
A bond has a quoted price of $984.63, a face value of $1,000, a semi-annual coupon of $20, and a maturity of 10 years. Match its current yield and its YTM below.
YTM - 4.19% Current yield - 4.06%
What is a bond's current yield?
Current yield = Annual coupon payment/current price
ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 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 $1,000 repayment of principal at the end of 10 years.
At what tax rate will you be indifferent between a muni that yields 7 percent and a comparable corporate bond yielding 9 percent? Assume no state taxes.
22.2%
Use your calculator to find the YTM on a 20 year, $1000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1104.89.
3.75%
Which of the following is true about a multi-year typical bond's coupon?
It is a fixed annuity payment
What is a real rate of return?
It is a rate of return that has been adjusted for inflation.
When the US government wants to borrow money for the long-term (more than one year) it issues:
Treasury notes Treasury bonds
If you invest in a corporate bond, how many times can you expect, in general, to receive interest?
Twice a year
A bond's yield to maturity considers the interest earnings and the change in the bond's price while the current yield considers ________.
interest earnings only
The degree of interest rate risk depends on ________.
the sensitivity of the bond's price to interest rate changes.
If a $1,000 par value bond is trading at a premium, the bond is:
trading for more than $1,000 in the market.
If you purchase a bond costing $1,143 with a par value of $1,000 that pays a semi-annual coupon of 5%, how much will each coupon payment be?
$25
If you invest in a $1,000 corporate bond that has a 9 percent coupon and makes semi-annual payments, you can expect to receive _________.
$45 every 6 months $1,000 (.09/2)
What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year?
10%
What is the effective annual yield for a bond that pays interest semiannually and has a quoted yield to maturity of 10 percent?
10.25%
Which of the following is true about interest rate risk?
All else equal, the longer the time to maturity, the greater the interest rate risk All else equal, the lower the coupon rate, the greater the interest rate risk
The reason that interest rate risk is greater for _______ term bonds than for ________ term bond is that the change in rates has a greater effect on the present value of the _____ than on the present value of the ________.
long; short; face value; coupon payments
Match each of these bonds with their characteristics CAT bond Convertible bond Put bond Structured bond
CAT bond - Protects insurance companies from natural disasters Convertible bond - Can be exchanged for shares of stock Put bond - Owner can force issuer to repay prior to maturity at a stated price Structured bond - Based on financial securities, commodities, or currencies
What is a discount bond?
Discount bonds are bonds that sell for less than the face value.
What are three important features of Treasury notes and bonds?
Highly liquid Default-free Taxable
Which of these are required to calculate the current value of a bond?
Par value Coupon rate Applicable market rate Time remaining to maturity
Which of these is included in the calculation of a bond's yield to maturity?
Par value Current price Coupon rate
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years.
Which two prices can be found in the Wall Street Journal's daily Treasury bond listing?
The asked price The bid price
Assume you own a bond that was issued by a blue-chip company. It the market rate of interest rises, what will happen to the value of your bond?
The bond value will fall.
You own two bonds -- one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
The bond with the 5 percent coupon rate is more sensitive.
Why is the YTM of a discount bond greater than the bond's current yield?
The current yield does not include the capital gain from the price discount.
Which of the following are features of municipal bonds?
The interest on municipal bonds is exempt from federal taxes. They are issues by state and local governments.
What is the effective annual rate on a bond with yield to maturity of 6 percent that pays semiannual interest?
6.09% [1+(.06/2)]^2-1
Which of the following spreadsheet functions can be used to calculate the YTM on a bond paying 5% annual coupons with $1,000 par value if the bond costs $943.82? The bond was purchased on 1/1/2015 and matures on 1/1/2030.
=YIELD(1/1/2015,1/1/2030,0.05,94.382,100,1)
What is the definition of a bond's time to maturity?
It is the number of years until the face value is due to be repaid.
Which of the following institutions issue bonds that are traded in the bond market?
State governments The federal government Public corporations
If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?
The 10-year bond
Supposed you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE bond will lose more because it has a longer maturity.
Suppose you own a 30-year bond issued by GE and a 2-year bond issued by PG with identical coupon rates and par values. Which bond will you decrease in value more as interest rates rise?
The GE bond will lose more because it has longer maturity.
Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds?
Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.
When using trial and error to compute the yield to maturity (YTM) for 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is ______ 6 percent.
lower than