MGF CH 6

What is a bond's current yield?

Current yield = Annual coupon payment/Price

Which of the following are true about a bond's face value? A bond's face value is the same for all corporations. 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. 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.

What are the two major forms of long-term debt?

public issue and private issue

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

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

What is the bid price?

It is the price an investor will receive if he sells a bond to a dealer. It is the price at which a dealer is willing to buy securities.

What is the asked price?

It is the price at which an investor can buy a particular security from a dealer. It is the price at which a dealer is willing to sell a particular security.

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

As a general rule, which of the following are true of debt and equity? Multiple select question: The maximum reward for owning debt is fixed. Equity represents an ownership interest. 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

As a general rule, which of the following are true of debt and equity?

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

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

Time to maturity Coupon rate

True or false: All else being equal, a one-year bond's price is less sensitive to interest rate changes as compared to that of a ten-year bond's price. True false question.

True

True or false: Current yield = Annual coupon payment/Price

True

True or false: Long-term debt has maturities greater than one year.

True

True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amoun

True

True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.

True

True or false: Low-grade bonds may not be rated by major rating agencies.

True

The coupon payments on floating-rate bonds are _____.

adjustable

If bonds for AT&T are quoted at 115, they can be purchased:

at 115% of par value plus accrued interest

If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____.

at 99.5 percent of face value plus any accrued interest

A corporate bond's yield to maturity:(Which is true?) is always equal to a bond's coupon rate The yield and the coupon rate will be equal only if a bond sells for its par value. remains fixed over the life of the bond changes over time is usually not the same as a bond's coupon rate

changes over time is usually not the same as a bond's coupon rate

A bond's _________ , payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

coupon

The bid-ask spread represents the ___.

dealer's profit

Debt cannot be subordinated to

equity

A bond with a BB rating has a ______ than a bond with an BBB rating.

higher risk of default

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows ____.

increases

A key difference between interest payments and dividend payments is?

interest is tax deductible dividends are not tax deductible

A zero-coupon bond is a bond that ____.

makes no interest payments

Bonds issued by state and local governments are called _______ ______.

municipal bonds

Equity represents a(n)_________interest of a firm.

ownership or owner's

A part of the indenture limiting certain actions during the term of the loan are termed ________.

protective covenants

Which type of debt is given preference in the event of default?

senior

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

The degree of interest rate risk depends on ____.

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

Junk bonds have the following features:

they are rated below investment grade bonds

If a $1,000 par value bond is trading at a premium, the bond is: Multiple choice question.

trading for more than $1,000 in the market

Which of the following are true of bonds? They are issued by both corporations and governments They are normally interest-only loans Bond principal does not have to be repaid

They are issued by both corporations and governments They are normally interest-only loans

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

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.

What will happen to a bond's time to maturity as the years go by?

It will decline

If you are holding two bonds - one with a 5% coupon rate and the other with an 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal?

The bond with a 5% coupon rate

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

decrease

Which of the following variables is NOT required to calculate the value of a bond? Original issue price of bond Remaining life of bond Coupon rate Market yield to maturity

Original issue price of bond

True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.

False

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

Changes in interest rates cause changes in bond prices.

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

What is a discount bond?

Discount bonds are bonds that sell for less than the face value.

True or false: Zero coupon bond calculations use semiannual periods to be consistent with coupon bond calculations.

True

What are the two unique features of a U.S. federal government bond?

U.S. Treasury issues are considered to be default-free. U.S. Treasury issues are exempt from state income taxes.

A bond's coupon payment is:

a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

The bonds of a firm in financial distress may have a market value that is__________ than the face value at maturity.

less

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate

What is a premium bond?

A bond that sells for more than face value

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk?

The 10-year bond

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

Par value Coupon rate Time to maturity Applies to what?

Bond

What are municipal bonds?

Bonds that have been issued by state or local governments

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a

Call provision

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

As a general rule, which of the following are true of debt and equity?

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

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

Market interest rate fluctuations

Which of the following is true of zero coupon bonds?

No coupon payments are made on the bonds

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

Par value Coupon rate Time to maturity

What does the AAA rating assigned by S&P mean?

The firm is in a strong position to meet its debt obligations

Which of the following are features of municipal bonds?

The interest on municipal bonds is exempt from federal taxes. The interest on municipal bonds is, in some cases exempt from state taxes in the state of issue. They are issued by state and local governments.

Which of the following are usually included in a bond's indenture? The repayment ... The total amount of bonds...

The repayment arrangements The total amount of bonds issued

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

Yield to maturity Coupon rate Par value Time remaining to maturity

Which of these correctly identify differences between U.S. Treasury bonds and corporate bonds? Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds do not offer any tax benefits to investors but corporate bonds do. Reason: U.S. Treasury bond interest is exempt from state income taxes. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.

Treasury bonds are considered free of default risk while corporate bonds are exposed to default risk. Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer. Treasury bonds are issued by the US government while corporate bonds are issued by corporations.