FIN 101 - CH 6

T/F: A debenture is a bond secured with collateral.

False

The term structure of interest rates examines the _ . a) changes in bond values over time. b) relationship between short-term and long-term interest rates. c) relationship between coupon rates and market yield. d) relationship between par value and market price.

b) relationship between short-term and long-term interest rates.

A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5? a) It will depend on the market price at year 5 b) $5,500 per bond c) $5,350 per bond d) $5,000 per bond

d) $5,000 per bond

Equity represents a(n) _ interest of a firm.

ownership

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year? a) 1% b) 10% c) It will depend on the bond rating for that year. d) 9.09%

= coupon interest payment / par value = 100 / 1000 = .10

If a bond is selling at a discount from its par value, the YTM must be _ the coupon rate. a) equal to b) greater than c) less than

b) greater than The YTM is greater than the coupon rate for a discount bond.

You invest in a bond paying 6% interest paid semiannually with a face value of $1,000. The bond matures in 8 years and current market rates are 5%. What is the current value of the bond? a) $1,065.28 b) $1,000 c) $1,108.38 d) $738.24

a) $1,065.28 N = 8 times 2 I/Y = 5% divide by 2 PMT = 30 FV = 1000 CPT PV = -1065.28

When interest rates in the market rise, we can expect the price of bonds to _ . a) decrease b) not change c) increase

a) decrease

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows _ . a) decreases b) increases c) remains unchanged.

b) increases

The degree of interest rate risk depends on _ . a) how many times the interest rate changes in a year b) the sensitivity of the bond's coupon rate to interest rate changes c) the face value of a bond d) the sensitivity of the bond's price to interest rate changes

d) the sensitivity of the bond's price to interest rate changes

Assume a bond has a $1,000 par value, a coupon rate of 6 percent, annual interest payments, and 7 years to maturity. If the yield on similar bonds is 8 percent, what is the current market value of this bond? a) $895.87 b) $1,000 c) $883.49 d) $912.38

a) $895.87 = (coupon rate*par value) * [ [1 - (1 / (1+similar bonds rate)^ytm ) ] / similar bonds rate + [ par value / (1+similar bonds rate)^ytm ]

What is the real rate of return? Select all that apply. a) It is a rate of return that has been adjusted for inflation. b) It is a percentage change in buying power. c) It is a rate of return that has not been adjusted for inflation. d) It is an average rate of return on similar investments.

a) It is a rate of return that has been adjusted for inflation. b) It is a percentage change in buying power.

What are the three components that influence the Treasury yield curve? Select all that apply. a) The real rate of return b) The default risk premium c) Expected future inflation d) The interest rate risk premium

a) The real rate of return c) Expected future inflation d) The interest rate risk premium

The US Government borrows money by issuing: Select all that apply. a) Treasury Notes b) Treasury Pass-Through Certificates c) Treasury Bonds

a) Treasury Notes c) Treasury Bonds

A bond's coupon payment is: a) a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders b) a variable interest amount that is paid to bondholders based on the federal funds rate c) interest that is paid by the bond issuer when a bond matures d) a coupon that can be used by bondholders to receive discounts on goods produced by the corporation issuing the bonds

a) a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders

What four variables are required to calculate the value of a bond? a) coupon rate b) par value c) price at the time of bond issue d) yield to maturity e) time remaining to maturity

a) coupon rate b) par value d) yield to maturity e) time remaining to maturity

If a $1,000 par value bond is trading at a premium, the bond is: a) trading for more than $1,000 in the market. b) trading for $1,000 in the market. c) trading for less than $1,000 in the market. d) not actively traded due to its high price.

a) trading for more than $1,000 in the market.

Which of the following terms apply to a bond? Select all that apply. a) Dividend Yield b) Coupon Rate c) Par Value d) Time to Maturity

b) Coupon Rate c) Par Value d) Time to Maturity

When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have? a) Flat b) Upward sloping c) Humped d) Downward sloping

b) Upward sloping

What is a corporate bond's yield to maturity (YTM)? Select all that apply. a) YTM is another term for the bond's coupon rate. b) YTM is the prevailing market interest rate for bonds with similar features. c) YTM is the expected return for an investor who buys the bond today and holds it to maturity. d) YTM is the yield that will be earned if the bond is sold immediately in the market.

b) YTM is the prevailing market interest rate for bonds with similar features. c) YTM is the expected return for an investor who buys the bond today and holds it to maturity.

If the present value of the interest payments on a bond is $321 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be _ . a) $900 b) $320 c) $1,220 d) $1,000

c) $1,220

What is the current yield on a $1,000 par value bond that sells for $900 if the coupon rate is 10 percent? a) 10% b) 9% c) 11.11% d) 9.09%

c) 11.11% = ( coupon rate * par value ) / closing price = ( .10*1000 ) / 900 = .1111

What is a bond's current yield? a) Annual Coupon / Face Value b) Current Price / Face Value c) Annual Coupon Payment / Price d) Annual Coupon / Par Value

c) Annual Coupon Payment / Price

What is the definition of a bond's time to maturity? a) It is the period of time that has elapsed since the bond was issued. b) It is the number of years the corporation is expected to be in existence. c) It is the number of years until the face value is paid off. d) It is the number of years until the bond is sold by the bondholder.

c) It is the number of years until the face value is paid off.

If you are holding two identical bonds, except that one matures in 10 years and the other matures in 5 years, which bond's price will be more sensitive to interest rate risk? a) Time to maturity does not affect interest rate risk. b) The 5-year bond. c) The 10-year bond. d) Both bonds are equally sensitive.

c) The 10-year bond.

If you are holding two bonds - one with a 5% coupon rate and other with a 8% coupon rate - which one is more sensitive to interest rate risk, all other things being equal? a) The bond with a 8% coupon rate. b) Both bonds are equally sensitive. c) The bond with a 5% coupon rate. d) Interest rate risk is not affected by coupon rates.

c) The bond with a 5% coupon rate.

Which of the following are usually included in a bond's indenture? Select all that apply. a) The names of the bondholders b) The details of previous bond issues c) The repayment arrangements d) The total amount of bonds issued

c) The repayment arrangements d) The total amount of bonds issued

When using trial and error to compute the yield to maturity for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is _ 6 percent. a) equal to b) greater than c) lower than

c) lower than The YTM is less than the coupon rate for a premium bond.

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds? a) $1,060 at the end of 10 years. b) Interest at the end of each year, the amount of which is based on the current market rate of interest, and $1,000 at the end of 10 years. c) $60 at the end of each year in interest and $100 at the end of each year in principal payments. d) $60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

d) $60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

If the rate of inflation is 3 percent and the real rate of return is 9 percent, the nominal rate is approximately _ percent. a) 6 b) 11.23 c) 3 d) 12

d) 12 = (1+inflation rate) * (1+real rate of return) = 1 - answer = approximate nominal rate

What is a discount bond? a) Junk bonds that are rated below investment grade. b) Bonds with short maturities. c) Bonds that are distressed corporation sells at fire sale prices to raise emergency funds. d) Bonds that sell for less than the face value.

d) Bonds that sell for less than the face value.