Finance test 3

ABC Co. issued 1 million 6% annual coupon bonds that mature in 10 years. The face value is 1000 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 $1000 repayment of principal at the end of 10 years

Assume a bond has $1000 par value, a coupon rate of 6%, annual interest payments, and 7 years to maturity. If the yield on similar bonds is 8%, what is the current market value of this bond?

$895.87 PV = (.06x1000) x (1-1/1.08^7)/.08 + (1000/1.08^7) = 895.87

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 a premium bond?

A bond that sells for more than face value

A coupon payment is:

A fixed amount of interest that is paid annually or semiannually by the issuer to its bondholder

What is a discount bond?

Bonds that sell for less than the face value

A corporate bond's yield to maturity

Changes over time Is usually not the same as a bond's coupon rate

What is a bond's current yield?

Current yield= Annual coupon payment/price

What is the real rate of return?

It is a percentage change in buying power It is a rate of return that has been adjusted to remove inflation

Which of the following are true about a bond's face value?

It is also known as the par value It is the principal amount repaid at maturity

What is the definition of a bond's time to maturity?

It is the number of years until the face value is paid off

When using trial and error to compute the yield to maturity (YTM) for a 6% coupon bond that trades at a premium, the process can be shortened if the initial guess is ___ 6%.

Lower than

Which of the following is not required to calculate the value of a bond?

Original price issue of a bond

The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?

Time to Maturity Coupon Rate

Which of the following terms apply to a bond?

Time to maturity Par Value Coupon Rate

When interest rates in a market rise, we can expect the price of bonds to_____?

decrease

Which one of the following is the most important source of risk from owning bonds?

market interest rate fluctuations