BUAD 306 Midterm 2
If YTM = coupon rate, then par value _____ bond price
= Because coupon is at current market conditions, so bond is traded at par.
If YTM < coupon rate, then bond price _____ par value
> Because coupon is above current market conditions, so bond is traded at a premium.
Bond
A borrowing arrangement under which the borrower agrees to make payments of interest and principal on specific dates to the holders of the bond. The simplest among financial assets but also the most common
Coupon
A certificate that entitles consumers to an immediate price reduction when the product is purchased. It is also the interest payments the issuer promises to make to bondholders
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A discount; less than
Par Value
The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity (sold at face value).
Patent
an intangible real asset
Bonds issued by the U.S. government:
are considered to be free of default risk.
If YTM > coupon rate, then bond price _____ par value
< Because coupon is below current market conditions, so bond is traded at a discount.
PV of cash flows and bond value decreases when...
Interest rates decrease
PV of cash flows and bond value increases when...
Interest rates increase
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: .07 + (1 − t*) = .05. .05 − (1 − t*) = .07. .05(1 − t*) = .07. .05/(1 − t*) = .07. .05(1 + t*) = .07.
.05/(1 − t*) = .07.
If the NPV is positive, should the investment be accepted or rejected?
Accepted
Coupon Rate
Annual Coupon / Face Value (of bond)
If all other things the same, and Annuity A pays you on the first day of each month while annuity B pays you on the last day of each month, what is the difference in each annuity's PV's?
Annuity B has a smaller present value than annuity A
Municipal bonds:
Bonds issued by state and local governments, and pay interest that is free from federal taxation.
Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.
Coupon
Which one of the following applies to a premium bond? Coupon rate < Yield to maturity < Current yield Coupon rate = Current yield = Yield to maturity Yield to maturity > Current yield > Coupon rate Coupon rate > Current yield > Yield to maturity Coupon rate > Yield to maturity > Current yield
Coupon rate > Current yield > Yield to maturity
Chavez & Hwang just issued 15-year, 6.4 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
Debenture
A discount bond's coupon rate is equal to the annual interest divided by the:
Face Value
Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:
Face Value
3 types of bonds
Government Bonds, Municipal Bonds, Corporate Bonds
Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? - Real rate risk - Interest rate risk - Correct - Default risk - Liquidity risk - Taxability risk
Interest rate risk
Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? - Decreased in value due to the change in inflation rates - Experienced an increase in its bond rating - Maintained a fixed real rate of return - Increased in value in response to the change in market rates - Increased in value due to a decrease in time to maturity
Maintained a fixed real rate of return
Bond value (price) and interest rates are determined by...
Market Participants
The current yield is defined as the annual interest on a bond divided by the:
Market Price
Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the:
Market price of the bond will decrease.
A bond's principal is repaid on the ________ date.
Maturity
A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?
The current yield exceeds the coupon rate.
Net Present Value (NPV)
The difference between an investment's market value and its cost.
discounted cash flow (DCF) valuation
The process of valuing an investment by discounting its future cash flows
The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:
Yield to Maturity (YTM)
Assume the current market price of a bond exceeds its par value. Which one of these equations applies?
Yield to maturity < Coupon rate
A bond that is payable to whomever has physical possession of the bond is said to be in:
bearer form.
Treasury bonds are:
generally issued as semiannual coupon bonds.
All other things being equal, the longer the time to maturity, the _____ the interest rate risk.
greater
Darriji Systems has 10-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
in registered form.
When a bond's coupon rate is greater than (equal to / less than) its YTM, the bond's market value is greater than (equal to / less than) _____.
its par value
All other things being equal, the _____ the coupon rate, the greater the interest rate risk.
lower
Bond prices and interest rates move in ___________
opposite directions
Yield to Maturity (YTM)
the rate of return earned on a bond if it is held to maturity. In other words, the interest rate required in the market on a bond. Also the cost of borrowing for the issuer.
Coupon bond can always be thought of as a bundle of ____________________.
zero coupon bonds