Exam 2 Review
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life. coupon rate yield to maturity prime rate current yield
yield to maturity
The ________ is the expiration date of the bond. maturity date future value coupon yield to maturity
maturity date
"Junk" bonds are a street name for ________ grade bonds. investment extremely speculative speculative speculative and investment
speculative
A basis point is ________. one percentage point one-tenth of a percentage point one-thousandth of a percentage point one-hundredth of a percentage point
one-hundredth of a percentage point
You put 20% down on a home with a purchase price of $250,000. The down payment is thus $50,000, leaving a balance owed of $200,000. The bank will loan the remaining balance at 3.91% APR. You will make annual payments with a 30-year payment schedule. What is the annual annuity payment under this schedule? $11,009.49 $18,100.23 $6,666.67 $11,439.96
$11,439.96 MODE = END INPUT 30 3.91 -200,000 ? 0 KEY N I/Y PV PMT FV CPT 11,439.96
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates. fixed-income variable-income bully real
fixed-income
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise. effective annual rates daily rates annual percentage rates APYs
annual percentage rates
The ________ compensates the investor for the additional risk that the loan will not be repaid in full. default premium interest rate inflation premium real rate
default premium
To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate. number of compounding periods for the length of an investment number of compounding periods per year number of compounding periods per month number of discounting periods for the length of an investment
number of compounding periods per year
The ________ is a market derived interest rate used to discount the future cash flows of the bond. semiannual coupon rate yield to maturity compound rate coupon rate
yield to maturity
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________. the credit rating decreases, the default risk decreases, and the required rate of return decreases the credit rating increases, the default risk decreases, and the required rate of return increases the credit rating increases, the default risk decreases, and the required rate of return decreases the credit rating increases, the default risk increases, and the required rate of return decreases
the credit rating increases, the default risk decreases, and the required rate of return decreases
Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 8.00%. What is your investment worth in one year? $1,080.00 $1,082.43 $1,800.00 $1,824.30
$1,082.43 With PV = $1,000, APR = 8.00%, C/Y = 4, periodic interest rate = r = 0.02, we begin by taking (1 + periodic rate) to the power of C/Y. Doing this gives: (1.02)4 = 1.08243. Multiplying this number by PV gives $1,082.43. Or using a financial calculator, Present Value = -1,000, PMT =0, Rate = 8, Periods = 4, Compounding = 4, solve for FV = $1,082.43.
Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________. $40 $90 $45 $80
$80 The annual interest or coupon payment is equal to the coupon rate multiplied by the par value of the bond. Here that is (0.08) × ($1,000) = $80.
Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________. $1,000.00 $829.73 $1,196.36 There is not enough information to answer this question.
$829.73 MODE = END INPUT 20 10 ? -80 -1,000 KEY N I/Y P/V PMT FV CPT 829.73
Suppose you postpone consumption and invest at 6% when inflation is 2%. What is the approximate real rate of your reward for saving? 6% 4% 5% 3%
4% We can see that an inflation rate of 2% is 4% less than our 6% investment rate. Thus, 4% is the real rate of your reward for saving.
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE? The bonds are selling at a premium to the par value. The bond market currently requires a rate (yield) less than the coupon rate. The coupon rate is greater than the yield to maturity. All of the above are true.
All of the above are true
In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis. True False
False In constructing a yield curve you place interest rates on the vertical axis, and TIME TO MATURITY on the horizontal axis.
Which of the below is NOT a major component of interest rates? Real rate Inflation premium Default premium Historical interest rates
Historical interest rates
The Fisher Effect involves which of the items below? Nominal rate, the bond rate, and inflation Nominal rate and inflation only Nominal rate, the real rate, and inflation Nominal rate and the real rate only
Nominal rate, the real rate, and inflation
Which of the statements below is FALSE? The prices of goods and services tend to decrease over time because of inflation. The real interest rate is the reward for waiting. The reward for postponing consumption implies that at the end of the year you will be able to buy more goods. Nominal interest rates are the sum of two major components: the real interest rate and expected inflation.
The prices of goods and services tend to decrease over time because of inflation. Prices of goods and services tend to increase over time because of inflation.
Which of the following are issued with the shortest time to maturity? Treasury bonds Treasury notes Treasury stocks Treasury bills
Treasury bills
The most common shape for a yield curve is upward sloping. True False
True
The ________ is the interest rate printed on the bond. semiannual coupon rate coupon rate yield to maturity compound rate
coupon rate
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. coupon rate; discount to coupon rate; premium over time to maturity; same price as time to maturity; discount to
coupon rate; discount to
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future. short-term equity short-term debt long-term debt long-term equity
long-term debt
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instruments. bills; bonds; notes notes; bonds; bills bonds; bills; notes notes; bills; bonds
notes; bonds; bills
The ________ is the face value of the bond. maturity date par value coupon rate coupon
par value
RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner (semiannual compounding)? $1,000 $231.38 $239.39 This question cannot be answered because the coupon payment information is missing.
$231.38 PRICE = FV/(1+r)^n MODE = END, P/Y = 2, C/Y = 2 INPUT 30 10 ? 0 -1,000 KEY N I/Y PV PMT FV CPT 231.38
The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond? $1,171.59 $1,170.27 $850.61 $849.54
$849.54 MODE = END, P/Y = 2, C/Y = 2 INPUT 40 12 ? -50 -1,000 KEY N I/Y PV PMT FV CPT
Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds? 6.54% 6.55% 7.00% 7.35%
6.54% MODE = END, P/Y = 1, C/Y = 1 INPUT 20 ? -1,050 70 1,000 KEY N I/Y PV PMT FV CPT 6.54
Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond? Callable bond Convertible bond Putable bond Junior bond
Callable bond
What is the EAR if the APR is 5% and compounding is quarterly? Slightly below 5.09% Over 5.25% Under 5.00% Slightly above 5.09%
Slightly above 5.09% Using the EAR formula, we get 5.0945%, or slightly above 5.09%. EAR = [(1 + APR/m)m] -1 = [(1 + .05/4)4] - 1 = 5.0945%.
Which of the statements below is TRUE? The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see lower borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is lower than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.
The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms. All other answers besides D have at least one word that disagrees with the correct words found in D.
The ________ is the regular interest payment of the bond. coupon rate par coupon dividend
coupon
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________. you will be able to buy fewer goods or services you will be able to buy more goods or services you will be able to consume fewer goods you will be able to buy the same amount of goods or services
you will be able to buy more goods or services
Which of the following statements is FALSE? The APR can be referred to as a promised annual percentage rate. The period in which interest is applied or the frequency of times interest is added to an account each year is called the compounding period or compounding periods per year. Although an APR is quoted on an annual basis, interest can be paid monthly but never daily. Although an APR is quoted on an annual basis, interest can be paid quarterly.
Although an APR is quoted on an annual basis, interest can be paid monthly but never daily.
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE? The bank is lending money to you, but not borrowing money from you. The bank is technically renting money from you with a promise to repay that money with interest. The bank is borrowing money from you without a promise to repay that money with interest. The bank is lending money to you with a promise to repay that money with interest.
The bank is technically renting money from you with a promise to repay that money with interest.
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE? When interest rates go up, bond prices go up. A bond selling at a discount means that the coupon rate is less than the yield to maturity. A bond selling at a premium means that the coupon rate is greater than the yield to maturity. When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
When interest rates go up, bond prices go up. When interest rates go up, bond prices fall.
Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond? $1,170.27 $850.61 $1,181.54 $843.14
$850.61 MODE = END INPUT 20 12 0 -100 -1,000 KEY N I/Y PV PMT FV CPT 850.61