FIN MGT TEST 3

If you invest in a $1000 corporate bond that has a 9% coupon and makes semi-annual payments, you can expect to receive____.

$45 every 6 months

A bond pays annual interest payments of $50, has a par value of $1000, and a market price of $1200. How is the coupon rate computed?

$50/$1000

What is the effective annual rate for a bond with a 7% yield to maturity that makes semi-annual interest payments?

7.12%

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 50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7%. what will be the total interest expense for the corporation?

$3.5 million

What is true about a bond's face value?

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

What terms apply to a bond?

1. par value 2. time to maturity 3. coupon rate

What variables are required to calculate the value of a bond?

1. remaining life of bond 2. coupon rate 3. market yield

What institutions issue bonds that are traded in the bond market?

1. state governments 2. federal government 3. public corporations

What are 3 important features of Treasury notes and bonds?

1. taxable 2. highly liquid 3. default-free

What two prices can be found in the Wall Street Journal's daily Treasury bond listing?

1. the bid price 2. the asked price

How is an APR computed?

rate per period x number of periods per year

If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.

real

As an investor in the bond market, why should you be concerned about changes in interest rates?

Changes in interest rates cause change in bond prices

What are some reasons why the bond market is so big?

1. Federal government borrowing activity in the bond market is enormous 2. various state and local governments also participate in the bond market 3. many corporations have multiple bonds issues outstanding

What 6 factors determine the yield on a bond?

1. Liquidity 2. expected future inflation 3. default risk 4. real rate of return 5. interest rate risk 6. taxability

What is a corporate bond's yield to maturity (YTM)?

1. YTM is the expected return for an investor who buys the bond today and holds it to maturity 2. YTM is the prevailing market interest rate for bonds with similar features

What is true about interest rate risk?

1. all else equals, the longer the time to maturity, the greater the interest rate risk 2. all else equal, the lower the time to maturity, the greater the interest rate risk

What are the 3 components of the nominal rate of return?

1. compensation for the inflation effect on the investment earnings 2. compensation for the inflation effect on the original investment 3. real rate of return

What is included in the calculation of a bond's yield to maturity?

1. current price 2. coupon rate 3. par value

What 3 things are common shapes for the term structure of interest rates?

1. humped 2. upward sloping 3. downward sloping

What are the 3 components of the Treasury yield curve?

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

What 3 components determine the shape of the term structure of interest rates?

1. interest rate risk premium 2. inflation premium 3. real interest rate

What is required to calculate the current value of a bond?

1. time remaining to maturity 2. coupon rate 3. applicable market rate 4. par value

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%

If the rate of inflation is 3% and the real rate of return is 5%, the nominal rate is approximately ____%?

8%

Which of the following is true about a multi-year typical bond's coupon?

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 a real rate of return?

It is the rate of return that has been adjusted for inflation.

What is the nominal rate of return on investment?

It is the rate that has not been adjusted for inflation

Which has a higher value, the bid price quote or the asked price quote?

The asked price quote is higher

Why does a bond's value fluctuate over time?

The coupon rate and par value are fixed, while market interest rates change.

Which is more transparent, the stock market or the bond market?

The stock market is more transparent

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.

YTM= 4.11% Current Yield= 4.06%

A bond's YTM will exceed its current yield when the bond is selling at ____.

a discount

A corporate bond's yield to maturity______.

changes over time and can be greater than, equal to, or less than the bond's coupon rate

What is a bond's current yield?

current yield = annual coupon payment/current price

When interest rates in the market rise, we can expect the price of bonds to ____.

decrease

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

greater than

In general, a corporate bond's coupon rate _____.

is fixed until the bond matures

What is the bid price?

is the price at which the dealer is willing to buy securities

What will happen to the default risk premium during periods of economic uncertainty?

it will increase

A market is considered transparent if_____?

its prices and trading volume are easily oberseved

If a $1000 par value bond is trading at a discount, it means that the market value of the bond is _____$1000.

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

All else held constant, the yield on a highly liquid bond will be ____ the yield on an illiquid bond.

lower than

The degree of interest rate risk depends on _____.

the sensitivity of the bond's price to interest rate changes

If a $1000 par value bond is trading at a premium, the bond is:

trading for more than $1000 in the market