MGNT 3125 Chapter 6

Bonds are rated according to the likelihood of ......

default

The portion of a bond's yield that investors require to compensate for the possibility that the bond's interest or principle might not be paid is called what?

default risk premium

The bond-ratings of Moody's and Standard and Poor's are not concerned only with the possibility of ......; these bond ratings do not address the volatility of the bond price due to .....

default; interest rate

What is the provision that prohibits a company from redeeming the bond prior to a certain date?

deferred call provison

When a bond cannot be called for a number of years after issue; this is a ..... call, and the bond is ...... during this period.

deferred; call protected

The ..... price of a bond includes quoted price and accrued interest.

dirty price

What is a bond with the yield to maturity higher than the coupon rate called?

discount bond

When a bond selling for less than the face value, what type of bond is it?

discount bond

In most cases, the call price will be equal to the ..... of the bond plus a ......

face value; call premium

The profit that securities dealer earns from the purchase and subsequent sale of security is called:

spread

How much does a corporate bond with a $1,000 face value quoted as 102:78 sells for?

$1,027.80

How much does a treasury bond $1,000 face value and quoted as 97:09 sell for?

$972.8125

Last year your bond investment has earned you a 8.25% rate of return. During that time the inflation rate was 1.75%. What is your real rate of return?

6.39%

Last year your bond investment has a 5.05% real rate of return and during that time the inflation rate was 3.25%. What is your actual nominal rate of return?

8.46%

True of False: Bond market is less transparent than stock market.

True

True of False: Bonds are generally bought from and sold to electronically connected dealers.

True

True of False: Face value and par value are synonyms terms.

True

True of False: Getting up-to-date prices on individual bonds is often difficult.

True

Which type of bonds have dated coupon attached to them which the bondholders has to detach a coupon and mail to firm which then makes the interest payment.

bearer

What allows the issuer to repurchase the bond debt issue prior to maturity?

call provision

What is the right given to the bond's issuer to repurchase the bond at a predetermined price prior to maturity?

call provision

The interest rate risk premium is the compensation that investors require for their assumption of the risk related to:

changes in interest rates

The price of a bond quoted not of accrued interest is the ....... price; the price which includes accrued interest is the ...... price.

clean; dirty

A ...... bond can be exchanged for a fixed number of stocks.

convertible

A bond that has the features of both debt and equity and can be exchanged for shares of stock of the issuing firm is called?

convertible bond

A bond coupon payments are calculated based on what rate when the bond is issued?

coupon rate

When the market value of the bond is equal to its face value, the yield to maturity should be equal to ........

coupon rate

What is the bond annual coupon payment divided by the current price.

current yield

A ....... is an unsecured bond for which no specific pledge of property is made.

debenture

A ....... is an unsecured debt that generally matures in ten years or more.

debenture

A bond that was previously rated as investment-grade but has been downgraded to junk-bond status is called what?

fallen angel

What type of bond has adjustable coupon payments that are tied to a specific index?

floating-rate bonds

All other things being equal, the longer the time to maturity, the ....... interest rate risk.

greater

The lower the coupon rate the ....... the interest rate risk.

greater

A premium bond is a bond that:

has a market value greater than the par value

The coupon payments of a ....... bond are paid only when the firm's income is sufficient to do so.

income bond

The written agreement between the corporation and the lender detailing the terms of the debt issue is called the bond:

indenture

The compensation investors require to offset expected future increases in prices is generally called what?

inflation premium

A ....... bond is a bond that pays fixed coupon payments at regular period of time. A ....... bond is a bond that is sold at a deep discount and it makes only one payment at maturity.

level-coupon; zero-coupon

What is the portion of the nominal rate that represents compensation for the illiquidity?

liquidity premium

Bonds with high rating indicate ...... probability of default.

low

What bond carries some default risk and is exempt from federal income taxation?

municipal

A .... restricts the issuer actions, where as a .... requires that certain actions be taken by the corporation.

negative covenant; positive covenant

The yield to maturity of a bond is also called the bond:

nominal rate

What type of rate is observed in the financial market?

nominal rate

The Fisher effect addresses the relationship between:

nominal rates, real rates, and inflation rates

A ....... is an unsecured debt that generally matures in less than ten years.

note

Most bond trading takes place......, therefore it is ....... to obtain data on bond prices and volumes and the bond market is considered ........

over the counter; difficult; not transparent

A bond whose yield to maturity equals the coupon rate and whose market price is equal to the face value is called what?

par value bond

When the yield to maturity is lower then the coupon rate, the bond should be:

premium bond

The value of bonds equals the sum of the ..... of both the future.... and the .......

present value; coupon payments; face value

What restricts action of the bond user?

protective covenant

A bond that gives the bondholder the right to force the issuer to purchase the bond at a stated price is called what?

put bond

What is the yield to maturity for a bond?

rate of return

What is the rate that has been adjusted for inflation?

real rate

If a bond is ......., the company's registrar mails the interest payments to the owner of record.

registered

What governs priority of payment to creditors in the event of bankruptcy?

seniority

What is the account managed by the bond trustee for the purpose of early bond redemption?

sinking fund

A debt is ....... when creditors must be repaid first.

subordinated

What portion of the nominal rate represents compensation for unfavorable tax status?

taxability premium

The observed relationship between short-term and long-term interest rates is known as what?

term structure of interest rates

The relationship between the nominal interest rates on default-free, pure discount securities and time of maturity; that is the pure time value of money is called the:

term structure of interest rates

What type of bond has no default risk?

treasury bond

When investors expect the interest-rate's in the future to be higher than the current interest rates the graphic depiction, the term structure of interest rates, will be :

upward-sloping

The graphical depiction of the term structure of interest rates.

yield curve

Bond valuation requires that we determine the ........ which is the market required rate of return on that bond at the time of valuation.

yield to maturity

To determine the values of a bond at a particular point in time we use .........., which is the market interest rate at the time for bonds with similar features.

yield to maturity

What type of bond makes no coupon payments, and is initially priced at a deep discount from par value?

zero-coupon bond