Chapter 6: Valuing Bonds
Which of the following sell bonds? -state and local governments -individuals and households -U.S. Treasury -Corporations
-State and Local Governments -U.S. Treasury -Corporations
A bond can also be called a: -debenture -share -leased asset -note
-debenture -note
Marley Corporation's bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the yield to maturity is _____. (Use trial and error to calculate yield).
10% 1) coupon pmts = 1,000*.05=$50 2) trial and error: FV = 1,000 PMT = 50 N = 4 I/Y = 5/8/10/12 PV = must equal 841.51
An individual invested $1,000 in a bond with a coupon payment of $12. The price of the bond increased to $1,400. What is the rate of return on this bond?
41.2% 1)ROR = (coupon income + price change) / investment = (12+400)/1000 = 41.2%
A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current interest rate of 6%. The bond will sell for
5,000 1) bond rate = interest rate so it sells at facevalue
Mortor's Corporation sold 6 year bonds for $1,072.62, with a face value of $1,000 and a coupon rate of 8%. The annual yield to maturity is:
6.5% 1) N = 6 PV = 1,072.62 PMT = 80 FV = 1,000 I/Y = ?
The price of a bond is equal to the
PV(coupon) plus PV(face value)
The total income per period per dollar invested is known as the:
Rate of Return
A bond that is priced below its face value is said to sell for
a discount
A bond that is priced above its face value is said to sell for
a premium
The current yield on a bond is equal to:
annual coupon payment divided by bond price
Governments and corporations borrow money by selling _______ to investors.
bonds
The interest payments to the bondholder are called the
coupon
A bond's _______ is fixed, but the present value is affected by changes in the ________.
coupon payment; interest rate
The _______ is the annual interest payment on a bond, expressed as a percentage of face value.
coupon rate
Bonds are defined as:
debt securities
A change in interest rate has the greatest effect on the present value of:
distant cash flows
If the bond's yield to maturity remains unchanged during the period, the bond price changes with time so that the total return on the bond is _____ the yield to maturity.
equal to
The payment made when a bond matures is called the bond's:
face value
When the coupon rate of a bond is equal to the current interest rate, the bond will sell for
face value
When interest rates rise, bond prices:
fall
When the interest rate is lower than the coupon rate on a bond, the price of the bond will be
higher than face value
When the interest rate is lower than the coupon rate on a bond, the price of the bond will be:
higher than face value
The __________ on government bonds provide a benchmark for all interest rates.
interest rates
If interest rates rise, the rate of return on a bond will be _____ the yield to maturity.
less than
The price of a bond can be quoted as a _____ of face value.
percentage
The total income per period per dollar invested is known as the
rate of return
The difference between the bid price and the asked price of a bond is the _______.
spread
For bonds priced at face value, the rate of return is
the coupon rate
A measure of return that takes account of both coupon payments and change in a bond's value over its life is a standard measure known as
yield to maturity
The purchaser of a bond pays the ______ price, whereas the investor who already owns the bond and sells it receives the ________ price.
asked; bid