connect 7 fundamentals of bonds
Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?
Coupon
Which one of the following relationships applies to a par value bond?
Coupon Rate= Current Yield=Yield to maturity
When short-term rates are higher than long-term rates, we say it is __________________.
downward sloping
Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the coupon rate, the _________ the interest rate risk.
lower:greater
Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond?
The price of the bond will fall.
current yield is the bonds annual coupon divided by its price
true
Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity?
14%
Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond?
Face value of the bond = $ 1000 ( Since, it is not given, I am assuming face value as $ 1000) Coupon rate = 10% Therefore, coupon value = 10% * $1000 = $ 100 Current price of the bond = $956.12 Current yield = Coupon value / Current price of the bond = $100 / $ 956.12 = 10.458 % = 10.46 % Answer: 10.46 %
Interest Rate Risk is the risk that arises for bond owners from fluctuating interest rates. All other things being equal, the _______ the time to maturity, the _________ the interest rate risk.
Longer: Greater
The current yield is defined as the annual interest on a bond divided by the:
Market Price
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
Market Price of the bond will decrease
A bond's principal is repaid on the ____ date.
Maturity
The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.
Nominal
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the
Yield to Maturity
Which one of these equations applies to a bond that currently has a market price that exceeds par value?
Yield to Maturity < Coupon Rate
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount: less than
Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?
face value
The term structure of interest rates includes all of the following basic components, except:
weighted average cost of capital
