Corporate Finance ch 6 & 7
The model that precisely specifies the relationship between the nominal rate and real rate is R=nominal rate r= real rate h= rate of inflation
(1+R)= (1+r)x(1+h)
Which bonds are not issued?
Bunt-n-run and silent bonds
Why should investors be concerned about changes in interest rates?
Changes in interest rates cause changes in bond prices
Which bonds are issued?
Coco, put bond, a convertible bond
Which of the following may increase the yield on corporate bonds as compensation to investors but will NOT impact treasury bond yields?
Default risk premium and liquidity premium
In the dividend growth model, the expected return for investors comes from which two sources?
Dividend yield and growth rate
Which of the following are cash flows to investors in stocks?
Dividends and capital gains
The price of a share of common stock is equal to the present value of all _____ future dividends
Expected
What 4 variables are required to determine the value of a bond?
FV, number of periods remaining, coupon & market interest rate/yield to maturity
A bond with a BB rating has a ______ Than a bond with an BBB rating
Higher risk of default
What is a real rate?
Interest rates or rates of return that have been adjusted for inflation
What is the equation for nominal rate of return?
R=r+h
The term structure of interest rates examines the
Relationship between short term and long term interest rates
What is the nominal rate of return on an investment?
The actual percentage change in the dollar value of an investment unadjusted for inflation.
The degree of interest rate risk is dependent on
The sensitivity of the bonds price to interest rate changes
The U.S. government borrows money by issuing
Treasury bonds and notes
True or False: The price you actually pay to purchase a bond will generally exceed the clean price
True; invoice price=clean price + accrued interest
When long-term rates are higher than short term rates what shapes will the term structure of interest usually have?
Upward sloping
A floating-rate bonds coupon adjusts
With a lag to some base rate
What is a corporate bonds yield to maturity
• the expected return for an investor who buys the bond today and hold it to maturity •the prevailing mkt interest rate for bonds with similar features
As a general rule, which of the following are true of debt and equity?
•Equity represents an ownership interest •The maximum reward for owning debt is fixed.
The term structure of interest rates describes
•the relationship between nominal rates and time to maturity •the pure time value of money
The sensitivity of a bonds price to interest rate changes is dependent on which of the following two variables
•time to maturity & coupon rate