fin 301 ch7

A bond pays annual interest payments of $50, has a par value of $1,000, and a market price of $1,200. How is the coupon rate computed? Multiple choice question. $50/$1,000 $50/[($1,000 + 1,200)/2] $50/$1,200 $50/($1,200 - 1,000)

$50/$1,000- correct $50/[($1,000 + 1,200)/2] Reason: Coupon rate is a percentage of par value, so in this case it's $50/$1,000 = 0.05 = 5%. $50/$1,200 Reason: Coupon rate is a percentage of par value, so in this case it's $50/$1,000 = 0.05 = 5%. $50/($1,200 - 1,000) Reason: Coupon rate is a percentage of par value, so in this case it's $50/$1,000 = 0.05 = 5%.

What is a premium bond?

A bond that sells for more than face value

Which of the following are true about a bond's face value? Multiple select question. A bond's face value is the same for all corporations It is the market value of the bond at the time of maturity It is also known as the par value. It is the principal amount repaid at maturity.

A bond's face value is the same for all corporations. Reason: While many bonds have a par value of $1,000, there are other denominations as well. It is the market value of the bond at the time of maturity. Reason: While the market value of a bond usually converges to the face value at maturity, this may not always be the case. For example, the bonds of a firm in financial distress may have a market value that is less than the face value at maturity. It is also known as the par value.- correct It is the principal amount repaid at maturity. - correct

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.

Which of these are required to calculate the current value of a bond? Multiple select question. Applicable market rate Price at the time of bond issue Coupon rate Time remaining to maturity Par value

Applicable market rate Coupon rate Time remaining to maturity Par value

What is a bond's current yield?

Current yield = Annual coupon payment/Current price

A firm's bond rating sheds light on its _________ risk.

Default

What is a discount bond?

Discount bonds are bonds that sell for less than the face value. because of a change in the quality of the bond or the issuer, or simply because market interest rates rose.

How is investing in U.S. Treasury bonds different from investing in corporate bonds? Multiple select questions. Interest from U.S. Treasuries is exempt from all taxation while corporate bond interest is taxable at all levels. Treasury issues have no default risk. U.S. Treasury bonds have longer maturities than corporate bonds. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.

Interest from U.S. Treasuries is exempt from all taxation while corporate bond interest is taxable at all levels. Reason: Interest on U.S. Treasury bonds is exempt from state but not federal income taxes. Treasury issues have no default risk.- correct U.S. Treasury bonds have longer maturities than corporate bonds. Reason: U.S. Treasury bonds have a maximum maturity of 30 years whereas some corporate bonds have a 100-year maturity. Interest from U.S. Treasuries is exempt from taxes at the state level but corporate interest is not.- correct

Which of the following is true about a typical multiple-year bond's coupon? Multiple choice question. The interest payment will vary with the market rate of interest. Interest payments are paid at the discretion of CFO. It is a fixed annuity payment. It is a fixed interest payment paid at the time the bond matures.

It is a fixed annuity payment.

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.

What is an interest-only loan? Multiple choice question. It's a loan in which the borrower pays all of the interest owed when the bond matures. It's a loan in which the borrower never repays the principal It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures. It's a loan in which the borrower pays both interest and principal periodically.

It's a loan in which the borrower pays all of the interest owed when the bond matures. Reason: It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures. It's a loan in which the borrower never repays the principal. Reason: It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures. It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.- correct It's a loan in which the borrower pays both interest and principal periodically. Reason: It's a loan in which the borrower pays interest periodically and repays the principal when the bond matures.

Which of the following variables are required to calculate the value of a bond? Multiple select question. Market yield Issue price of the bond Remaining life of bond Coupon rate

Market yield, remaining life of bond, coupon rate

Which one of the following is the most important source of risk from owning bonds? Multiple choice question. Mergers Market interest rate fluctuations Loss of a bond certificate Coupon interest rate fluctuations

Mergers Reason: While a potential merger could expose bondholders to risk, it is not an important source of risk. Market interest rate fluctuations- correct Loss of a bond certificate Reason: Since bonds in the United States are registered, loss of the certificate is not a risk. Coupon interest rate fluctuations Reason: Coupon interest rates are fixed for many bonds.

Why does a bond's value fluctuate over time? Multiple choice question. The coupon rate varies, while market interest rates are fixed The coupon rate and par value are fixed, while market interest rates change A bond's value does not fluctuate over time A bond's par value changes over time

The coupon rate varies, while market interest rates are fixed Reason: Market interest rates vary, which causes the bond's value to change. The coupon rate and par value are fixed, while market interest rates change- correct A bond's value does not fluctuate over time Reason: Bond values continually fluctuate. Market interest rates vary, which causes the bond's value to change. A bond's par value changes over time Reason: The par value is constant. Market interest rates vary, which causes the bond's value to change.

As a general rule, which of the following are true of debt and equity? Multiple select question. Creditors generally have voting power Debt and equity represent the same financial claims The maximum reward for owning debt is fixed Equity represents an ownership interest

The maximum reward for owning debt is fixed Equity represents an ownership interest

What does the clean price for a bond represent?

The quoted price, which excludes interest accrued since the last coupon date.

What information is needed to compute a bond's yield-to-maturity? Multiple select questions. Inflation rate Time to maturity The bond's current price Coupon rate

Time to maturity The bond's current price Coupon rate

Which of the following terms apply to a bond? Multiple select question. Dividend yield Time to maturity Par value Coupon rate

Time to maturity, Par value, Coupon rate

True or false: A bond's value is not affected by changes in the market rate of interest.

True Reason: Bond prices are inversely related to interest rates. False- correct

What is a corporate bond's yield to maturity (YTM)? Multiple select question. YTM is the prevailing market interest rate for bonds with similar features. YTM is another term for the bond's coupon rate. YTM is the yield that will be earned if the bond is sold immediately in the market. YTM is the expected return for an investor who buys the bond today and holds it to maturity.

YTM is the expected return for an investor who buys the bond today and holds it to maturity. YTM is the prevailing market interest rate for bonds with similar features.

The main reason it is important to distinguish between debt and equity is the benefits and risks _____. Multiple choice question. never change are similar are different

are different

A bond's _________rate is the stated interest payment made on a bond.

coupon

The ________yield is the bond's annual coupon divided by its price.

current

When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows ____. Multiple choice question. decreases increases remains unchanged

decreases Reason: When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows increases. increases- correct remains unchanged Reason: When interest rates in the market fall, bond values are likely to increase because the present value of the bond's remaining cash flows increases.

In general, a corporate bond's coupon rate ____, Multiple choice question. decreases as a bond nears maturity is fixed until the bond matures changes every year changes in sync with market interest rates

decreases as a bond nears maturity Reason: In general, a bond's coupon rate is fixed until the bond matures. is fixed until the bond matures-correct changes every year Reason: In general, a bond's coupon rate is fixed until the bond matures. changes in sync with market interest rates Reason: In general, a bond's coupon rate is fixed until the bond matures. Some bonds have floating rates, but most are fixed.

In an inflationary environment, the nominal rate will be _________ the real rate.

greater than

Longer-term bonds have (smaller/greater) interest rate sensitivity because a (smaller/larger) portion of a bond's value comes from the face amount.

greater;larger

The written agreement between the corporation and the lender detailing the terms of the debt issue is the _________.

indenture

The relationship between bond prices and the market rate of interest is ____.

inverse; if the market rate of interest rises, bond prices will fall- correct

If a $1,000 par value bond is trading at a discount, it means that the market value of the bond is ______ $1,000.

less than

The reason that interest rate risk is greater for ____ term bonds than for ____ term bonds 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

A bond's ______is the number of years until the face value is due to be repaid.

maturity

The information needed to compute a bond's yield to maturity includes the bond's _______coupon rate, and maturity date.

price

The two major forms of long-term debt are _______ issue and privately placed.

public

A corporate bond's yield to maturity ____. Multiple select question. remains fixed over the life of the bond changes over time is always equal to the bond's coupon rate can be greater than, equal to, or less than the bond's coupon rate

remains fixed over the life of the bond Reason: The YTM changes as prevailing market conditions change and the risk and time to maturity of the bond change. changes over time- correct is always equal to the bond's coupon rate Reason: The YTM and the coupon rate will be equal only if a bond sells for its par value. can be greater than, equal to, or less than the bond's coupon rate-correct

If you own corporate bonds, you will be concerned about interest rate risk as it affects ____.

the market price of the bonds

If a $1,000 par value bond is trading at a premium, the bond is _____.

trading for more than $1,000 in the market- correct