Chapter 6

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Zero coupon

The price at which a dealer will purchase a bond is referred to as the _____ price.

bid

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the

bid-ask spread.

The call premium is the amount by which the:

call price exceeds the par value.

The inflation premium:

compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a:

coupon bond's yield to maturity to decrease.

Which one of the following is the price that an investor pays to purchase an outstanding bond?

Dirty price

Which one of the following bonds is the most sensitive to changes in market interest rates?

10-year, zero coupon

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:

2-year, 7 percent coupon bonds.

Which one of the following statements is true?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is:

BBB

Which one of the following is the quoted price of a bond?

Clean price

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

Interest rate risk premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

Liquidity premium

The term structure of interest rates represents the relationship between which of the following?

Nominal rates on default-free, pure discount bonds and time to maturity

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

TIPS

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

The bond must be priced at par.

A bond's annual interest divided by its face value is referred to as the:

coupon rate.

The current yield on a bond is equal to the annual interest divided by the:

current market price.

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture

The yield to maturity on a discount bond is:

greater than both the current yield and the coupon rate

The yield to maturity on a discount bond is

greater than both the current yield and the coupon rate.

When a bond's yield to maturity is less than the bond's coupon rate, the bond

is selling at a premium

A protective covenant:

limits the actions of the borrower

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities

maturity

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price

The primary purpose of bond covenants is to:

protect the bondholders.

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity