Chapter 5

Bond

Issued by a corporation or government when they need to borrow money from the public on a long-term basis

Which of these are required to calculate the current value of a bond? Select all that apply a. Applicable market rate b. Time remaining to maturity c. Price at the time of bond issue d. Par value e. Coupon

A, B, D & E

The degree of interest rate risk depends on ____. a. the sensitivity of the bond's coupon rate to interest rate changes b. how many times the interest rate changes in a year c. the sensitivity of the bond's price to interest rate changes d. the face value of a bond

C

In general, a corporate bond's coupon rate ____. a. decreases as a bond nears maturity b. changes in sync with market interest rates c. changes every year d. is fixed until the bond matures

D

True or false: A bond's value is not affected by changes in the market rate of interest. a. True b. False

B

Why does a bond's value fluctuate over time? a. A bond's value does not fluctuate over time. b. The coupon rate and par value are fixed, while market interest rates change. c. The coupon rate varies, while market interest rates are fixed. d. A bond's par value changes over time.

B

If you invest in a $1,000 corporate bond that has a 9 percent coupon and makes semi-annual payments, you can expect to receive ____. a. $90 once a year b. $45 every 6 months c. $7.50 every month d. $22.50 every quarter

B [1,000(.09/2)]

Which of the following are true regarding bonds? a. The market value of a bond will never be equal to the face value of a bond. b. The market value of a bond is the future value of the annuity combined with the future value of a lump sum. c. The market value of a bond is the present value of the annuity combined with the present value of a lump sum. d. The market value of a bond is the future value of the annuity combined with the present value of a lump sum.

C

Which of the following are true of bearer bonds? Select all that apply a. They are easy to recover if they are lost or stolen. b. They are more common in the U.S. than registered bonds. c. The certificate is the basic evidence of ownership. d. The corporation does not know the owners of the bonds.

C & D

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 ____. a. $1,220 b. $900 c. $320 d. $1,000

C (320+900)

Which of these represents the difference between a registered and a bearer bond? a. Bearer bonds are more common today in the U. S. than registered bonds. b. Registered bonds pay interest only when bondholders request payment while bearer bonds pay interest payments automatically. c. Registered bonds have attached coupons while bearer bonds do not. d. Individual bond ownership is recorded for registered bonds but not bearer bonds.

D

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year? a. 9.09% b. It will depend on the bond rating for that year c. 1% d. 10%

D (100/1,000)

Which of the following are accurate statements? Select all that apply a. Equity represents ownership interest while debt does not. b. Equity is publicly traded while corporate debt is not. c. Interest payments on debt are tax deductible but dividend payments on stock are not. d. Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy.

A, C, & D

Which of the following are accurate statements? Select all that apply a. Interest payments on debt are tax deductible but dividend payments on stock are not. b. Equity is publicly traded while corporate debt is not. c. Equity represents ownership interest while debt does not. d. Unlike dividend omissions to equity holders, unpaid debt obligations can lead to bankruptcy.

A, C, & D

The federal government can raise money from financial markets to finance its deficits by ______. a. requesting foreign aid b. issuing stocks c. issuing bonds d. raising taxes

C

The relationship between bond prices and the market rate of interest is ____. a. non-existent; there is no specific relationship between bond price and market rates b. positive during the initial years and negative during the later years c. inverse; if the market rate of interest rises, bond prices will fall

C

What are municipal bonds? a. Secured loans obtained from a local bank by state or local governments b. U.S. Treasury bonds that are only available in some states c. Bonds that have been issued by state or local governments d. Bonds issued by a corporation for state and local projects

C

What is a bond's current yield? a. Current yield = Current price/Face value b. Current yield = Annual coupon/Face value c. Current yield = Annual coupon payment/Current price d. Current yield = Annual coupon/Par value

C