Chapter 1 Learnsmart 7

How is a conventional bond different from a zero coupon bond?

*Conventional bonds can sell at par, at a discount from par, or at a premium over par while zeros can not. *A conventional bond pays periodic interest whiles zeros make no interest payments.

Which of the following terms apply to a bond?

*Par value *Coupon rate *Time to maturity

What is a premium bond?

A bond that sells for more than face value

Secondary markets in sukuk are extremely illiquid because most sukuk are:

Bought and held to maturity

What is a bonds current yield?

Current yield = Annual coupon payment/Current price

Which of the following are true about a bond's face value?

It is the principal amount prepaid at maturity

If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ___ rate.

Real

If you own corporate bonds, you will be concerned about interest rate risk as it affects ___.

The market price of the bonds.

Which of the following are common protective covenants?

*The firm must limit dividends to equity holders *The firm must maintain working capital at or above a specified level *The firm cannot merge with any other firm

At what tax rate will you be indifferent between a muni that yields 7% and a comparable corporate bond yielding 9%? Assume no state taxes.

22.2%

If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be ___.

$1,220

What is a discount bond?

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

If you incest in a corporate bond, how many times can you expect, in general, to receive interest?

Twice a year

ABC Co. issued 1 million 6% annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of the bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

When the U.S. government wants to borrow money for the long-term (more than one year) it issues:

*Treasury Bonds *Treasury Notes

How is the zero coupon bond different from a conventional bond?

*Zero coupon bonds make no interest payments *Zero coupon bonds are always issued at a discount

What will your aftertax yield be on a corporate bond that is currently priced to yield 7% if you are in the 25% tax bracket?

5.25%

What will happen to the default risk premium during periods of economic uncertainty?

It will increase

A zero-coupon bond is a bond that ___.

Makes no interest payments

What does the AAA rating assigned S&P mean?

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

What does a Moody's bond rating of C typically indicate?

The insurer is in default

In terms of time of maturity, US Treasury notes and bonds have initial maturities ranging from ___ years.

2 to 30

Use your Calculator to find the YTM on a 20 year, $1000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1104.89.

3.75%

A bond's YTM will exceed its yield when the bond is selling at ___.

A discount