CH 6
A corporate bond's yield to maturity:
- Is usually not the same as a bond's coupon rate - Changes over time
What is a bond's current yield?
Current Yield = Annual Coupon Payment / Current Price
Bonds issued by state and local government are called _____.
Municipal Bonds
What are municipal bonds?
Bond that have been issued by state or local government.
What is a bond's accrued interest?
It is interest that has been earned but not yet received by the current bondholder
Which one of the following is the most important source of risk from woning bonds?
Market interest rate fluctuation
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/
The term structure of interest rates examines the ___.
The relationship between short-term and long-term interest rates
The bid-ask spread represents the ____.
dealer's profit
Which of the following are usually included in a bond's indenture?
- The repayment arrangements - The total amount of bonds issued.
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
- Time maturity - Coupon rate
What four variables are required to calculate the value of a bond?
- Time remainding to maturity - Yield to manurity - Par value - Coupon Rate
The US government borrows money by issuing:
- Tresury Bonds - Tresury Notes
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
If you are in the 20% federal income tax bracket, what is your after-tax yield on a municipal bond that is currently trading at par to yield 5%. Assume there are no state or local taxes.
5%. Interest income from the Muni is exempt from the federal income tax so the after-tax yield equals the before tax yield.
