Finance Test 2

all of the following are true about the relationship between yield to maturity and bond prices

A bond selling at a premium means that the coupon rate is greater than the yield to maturity. A bond selling at a discount means that the coupon rate is less than the yield to maturity. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.

which of the following is not a major component of interest rates?

Historical interest rate

To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.

Number of compounding periods per year

Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?

The bank is technically renting money from you with a promise to repay that money with interest.

Which of the statements below is TRUE?

The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.

When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.

annual percentage rates

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

callable bond

The_____ is the regular interest payment of the bond

coupon

the ___ is the interest rate printed on the bond

coupon rate

when the _____ is less then the yield to maturity, the bond sells at a/the _____ par value

coupon rate, discount to

The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

default premium

in constructing a yield curve you place interest rates on the vertical axis and risk on the horizontal axis

false

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

fixed income

A bond is a ____ instrument by which borrowers of funds agree to pay back the funds with interest on specific dates in the future

long term deft

The_____ is the expiration date of the bond

maturity date

The Fisher Effect involves which of the items below?

nominal rate, the real rate and inflation

Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments.

notes, bonds, bills

A basis point is

one-hundredth of a percentage point

the _____ is the face value of the bond

par value

"junk" bonds are a street name for ____ grade bonds

speculative

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.

the credit rating increases, the default risk decreases, and the required rate of return decreases

which of the following are issued with the shortest time to maturity

treasury bills

the most common share for a yield curve is upward sloping

true

the ____ is a market derived interest rate used to discount the future cash flow of the bond.

yield of maturity

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

yield to maturity

Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.

you will be able to ut more goods and services

All of the following statements are true

Although an APR is quoted on an annual basis, interest can be paid quarterly. The APR can be referred to as a promised annual percentage rate. The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year.