FINN 3120- Ch. 6 Interest Rates and Bonds
A corporate bond's yield to maturity:
(1) Changes over time (2) Is usually not the same as bonds coupon rate
As a general rule, which of the following are true of debt and equity?
(1) Equity represents an ownership interest. (2) The maximum reward for owning debt is fixed.
What are the three components that influence the Treasury yield curve?
(1) Expected future inflation (2) The real rate of return (3) The interest rate risk premium
What are some features of the OTC market for bonds?
(1) OTC dealers are connected electronically. (2) The OTC has no designated physical location.
What four variables are required to calculate the value of a bond?
(1) Yield to maturity (2) Time remaining to maturity (3) Coupon rate (4) Par value
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
Eurobonds
A bond placed in countries other than the one in whose currency the bond is denominated.
Mortgage Bonds
Bonds that are secured by real property.
convertible bonds
Bonds that can be converted into common stock at the bondholder's option
Which is not a difference between debt and equity?
Equity is publicly traded while debt is not
A limitation of bond ratings is that they ____.
focus exclusively on default risk
A limitation of bond ratings is that they ______
focus exclusively on default risk
A bond with a BB rating has a ______ than a bond with an BBB rating.
higher risk of default
The nominal rate is found by adding the _____ and the real rate of return.
inflation
A zero coupon bond is a bond that ____.
makes no interest payments
The term structure of interest rates examines the ____.
relationship between short-term and long-term interest rates
subordinate bonds
repaid only after unsubordinated bonds
Maturity
specific date on which the principal amount (face value) of a bond is paid
Coupon rate
the annual coupon divided by the face value of a bond
Bond ratings are based on the probability of default risk, which is the risk that ___.
the bond's issuer may not be able make all the required payments
Coupons
the stated interest payment made on a bond
Debenture
unsecured long-term debt
Most of the time, a floating-rate bond's coupon adjusts ____.
with a lag to some base rate
True or false: Bond ratings are concerned only with the possibility of price changes.
False
What is the nominal rate of return on an investment?
It is the actual percentage change in the dollar value of an investment unadjusted for inflation.
What does a Treasury yield curve show?
It shows the yield for different maturities of Treasury notes and bonds
Why is the bond market less transparent than the stock market?
Many bond transactions are negotiated privately.
Which variables is NOT required to calculate the value of a bond?
Original issue price of bond
What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.
Pay $800 today and receive $1,000 at the end of 5 years
What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate
R = r + h
face value (par value)
The principal amount of a bond that is repaid at the end of the term; ALWAYS $1,000
The US government borrows money by issuing:
Treasury notes and treasury bonds
True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.
True
True or false: The government sells Treasury notes and bonds to the public every month.
True
zero coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
What is a corporate bond's yield to maturity (YTM)?
(1) YTM is the prevailing market interest rate for bonds with similar features (2) YTM is the expected return for an investor who buys the bond today and holds it to maturity
Which of the following are bonds that have actually been issued?
(1) a CoCo bond (2) a convertible bond (3) a put bond
What is a real rate of return?
(1) it is a rate of return that has been adjusted for inflation (2) it is a percentage change in buying power
What does historical data suggest about the nature of short-term and long-term interest rates?
Sometimes short-term rates are higher and sometimes long-term rates are higher.
What does the AAA rating assigned by S&P mean?
The firm is in a strong position to meet its debt obligations
The coupon payments on floating-rate bonds are _____.
adjustable
Bond
an interest-only loan, meaning that the borrower will pay the interest every period, but none of the principal will be repaid until the end of the loan.