Exam2 Chapter 12

Suppose the coupon rate of a two year corporate bond with semi-annual compounding is 9​% and the par value of the bond is ​$1000. If interest rates have risen to 12​% since the bond was​ issued, then the price of the bond is

$948.02

What is true about inflation-indexed bonds

-It removes inflation risk arising from holding treasury securities. -At​ maturity, the securities are redeemed at the greater of their​ inflation-adjusted principal.

Current yield is an ______ of yield to maturity on coupon bonds.

-approximation

Assets with lower interest rates?

-equipment trust certifications -mortgage bonds

Features of the commodity futures modernization act passed by the congress in 2000

-it preempted states from enforcing gaming laws on derivative securities -it allowed investors to bet on securities they did not own -it removed credit default swaps from regulatory oversight

Features of revenue bonds

-revenue of the particular project is used as repayment -they are issued more frequently than general obligation bonds

What is true about feature bonds?

-they have dependable cash flows -they offer more security relative to stocks -their price fluctuates due to changes in market interest rate

Why may corporations raise funds through the capital market?

-to preserve their capital to protect against unexpected needs -to finance their investment projects

Reasons to introduce the trade reporting and compliance engine (TRACE)

-to specify which bond transactions must be reported publicly -to provide a platform that makes transaction data available to the public

Suppose a bond has a par value of ​$1,000​, a coupon interest rate of 11​%, and a market price of ​$875. The current yield of this bond is

12.57%

Suppose a Treasury note with 8 years remaining to maturity consists of a single principal payment at maturity and 16 interest​ payments, one every six months for 8 years. When this note is​ stripped, the single Treasury note becomes _____ securities that can be traded individually

17

Suppose a corporate bond pays an interest rate of 7.5​% and the marginal tax rate is 28​%. Then the equivalent​ tax-free rate on the bond is

5.4%

Which of the following statements correctly describe the current​ price? A. It is set such that the seller is indifferent between continuing to receive the cash flow stream provided by the asset and receiving the offer price. B. It is set such that the seller prefers continuing to receive the cash flow stream provided by the asset over receiving the offer price. C. It is set such that the seller prefers receiving the offer price over continuing to receive the cash flow stream provided by the asset. D. As is the case with other financial​ assets, it is the present value of all future cash flows

Both A and D

After a thorough financial​ analysis, a firm determines that it needs additional machines to meet the increased demand for its product. This analysis is made using interest rates that reflect the current ​long-term cost of funds to the firm. Suppose the firm chooses to finance these machines by issuing bonds. What happens if there is an increase in the interest rate?

The increased rate will be less critical compared to what it would have been under money market

T/F FINRA performs the function of consolidating the regulatory and oversight functions of National Association of Securities Dealers​ (NASD) with the New York Stock​ Exchange:

True

Should a firm have to liquidate, its bondholders will have _____ of receiving payment over its stockholders

a higher priority

When firms sell securities for the very first time, the issue is _______

an initial public offering

Bond holders face risk of suffering a loss due to changes in the interest rate. This risk is known as

an interest rate risk

_____ describe the lender's rights and privileges and the borrowers' obligation

bond indentures

Current yield equals yield to maturity if the ______

bond price equals the par value of the bond

The distribution of a firm's capital between debt and equity is called its

capital structure

The _____ is the rate of interest paid by the issuer to the investor it _______ with market interest rates

coupon rate does not fluctuate

_____ provide insurance against default in principal and interest payment of a credit instrument

credit default swaps

Where does the capital market trading occur?

either in the primary or in the secondary market

Corporate bonds generally have a face value ______

equal to $1000

trading is governed by the ___

exchange rules

when a firm chooses to issue stock, the market thinks that the stock price of the firm is going to ____ in the future

fall

federal government notes and bonds are ______

free of default risk

healthy firms with sufficient cash flow to pay both bondholders and stockholders _____ have volatile stock prices

frequently

General obligation bonds are backed by _____ of the issuer

full faith and credit

Capital market securities have an original maturity that is _____ one year

greater than

Most long-term interest rates are ______ than short-term rates

higher

Who are the largest purchasers of capital market securities?

households

A function of a financial guarantee?

i gives additional security to the bond purchaser in the event the issuer defaults

Most capital market transactions occur _____

in organized exchanges

What is a bond

it is a security that represents a debt owed by the issuer to the investor

Define market interest rate

it is always equal to the interest rate currently in effect in the market for similar securities

during the 1970s and early 1980s the interest rate on 10 year treasury bonds was _____ the rate of inflation

less than

if the market price of the bond is greater than the par value of the bond, then the current yield of the bond will be _____ the coupon rate of the bond

less than

Issuers of capital market securities..

local government, federal government, and corporations

Mostly, the rate of return on the 90 day treasury bills is _____ the rate of return on the 20- year treasury bonds

lower than

the short-term rates are _____ than long-term rates

more volatile

Examples of a capital market security?

mortgages, bonds and stocks

The municipal bond market

municipal bonds are not default-free

The current yield and yield to maturity are always _____ related to the price of the bond

negatively

In the late 1970s, who were junk bonds difficult to sell as compared to investment grade bonds?

no well-developed secondary market existed

When a financial guarantee is provided with bond, the bond purchaser is concerned with

only the financial health and the credit rating of the insurance company

Violation of rules by companies that trade in securities?

outside business activities, excessive markups, and late reporting

Bonds are traded_____

over the counter

the _____ is the amount that the issuer of a bond must pay a maturity

par value, maturity value

convertible bonds are issued by the firm if it believes that the stock prices are going to _____ in the future

rise

Long-term bonds do not include _____

shares issued by a firm

Governments never issue ____

stock

Describe Treasury STRIPS accurately

the bonds are also referred to as zero-coupon securities

if the repayment terms of a bond are not met,

the holder of the bond has a claim on the assets of the issuer

Describe primary markets

the issuer of the security actually receives the proceeds of the sale

Agency bonds have what type of risk

the risk on such bonds is very low

A secondary market is where ______

the sale of previously issued securities takes place

Why do corporate bonds have a call provision?

to buy back the bond as per the terms of the sinking fund

Maturity: less than 1 year

treasury bill

Maturity: 10 to 30 years

treasury bond

Maturity: 1 to 10 years

treasury note

Capital market investors...

use capital market for long-term investment

treasury bonds have ____ interest rates

very low

when does an investor's bond sell at a premium?

when the market price is higher than the par value