FIN 310 Chapter 6

quoted price =

"clean" price

invoice price-

"dirty" or "full" price, actually paid

Par=

$1000

Quoted yields=

are calculated based on invoice price

Accrued interest=

interest earned since the last coupon paymnet

Price(pv)

par value (or face value)*last price/ 100

Invoice paid for bond=

quoted price + accrued intrerest

Which of the following statements is TRUE? A. Companies are required by law to have their bonds rated by agencies such as Moody's or S&P. B. The Fisher effect is the relationship between nominal returns, real returns, and inflation. C. Investors require higher yields on secured bonds than on unsecured bonds. D. A callable bond can be swapped for a fixed number of shares of stock before maturity at the holder's option.

B. A. They are not required C. They do not require higher yields D. A callable bond, grants the issuer the option to repurchase the bond.

Which of the following statements is TRUE? A. When yields increase, bonds with shorter maturities tend to decrease in value more than bonds with longer maturities. B. Over time, if yields do not change, the values of premium bonds decrease toward par smoothly. C. A "call provision" allows the bond holder the option to determine when they want the company to buy back the bond. D. Treasury Bonds are pure discount loans sold by the US government as a means to borrow money for less than one year.

B. Why? A. LOL Yields increase, bond prices decrease C. Grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price D. That is T-bills. Treasury Bonds pay coupons: maturity issue >10 years

Which of the following statements is FALSE? A. A bond's yield represents the annualized return that an investor would earn by holding it to maturity, if it does not default. B. Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price on a discount bond will decrease. C. When interest rates increase, then bond prices fall, and moreso the longer their maturity and the smaller their coupons. D. If a bond is held to maturity and it does not default, then the reinvestment rate risk will offset the price risk.

B. more likely to default, then the price on the discount bond will increase.

Bond=

B=(c/m)/(y/m)*[1-1/(1+y/m)^m*t] + face/ (1+y/m)^m*T

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Taxability premium C. Default risk premium D. Liquidity premium

C. Default risk premium- for lower bond ratings FYI: Maturity Premium- on longer-term bonds Taxability premium-discount for municipal tax-exempt liquidity premium-when less frequently traded Anything else that affects the risk of the cash flows to the bondholders will affect the required returns

Which of the following statements is FALSE? A. The yield to maturity is a bond's rate of return that is required by the market place. B. When a bond's yield to maturity is less than a bond's coupon rate, the bond is selling at a premium. C. A convertible bond initially sells at a deep discount and pays no interest payments. D. The invoice amount that an investor actually pays to purchase an outstanding bond is not its 'clean' quoted price

C. IDK... but I know that it converts to common stock!!

Premium bond=

CR (coupon rate) >yield

Discount bond=

CR < yield

A call provision in a bond... A. Limits the actions of the borrower. B. Protects the borrower from unscrupulous practices by the lender. C. Allows the issuer to repurchase the bonds on the open market prior to maturity. D. Grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price.

D

Other things equal, investors will require higher yields on, and be willing to pay lower prices for, bonds with the following characteristics, except those which: A. Are unsecured B. Have less protective covenants C. Have lower credit quality D. Are convertible into common shares

D.

Which of the following statements is TRUE? A. The coupon rate on a previously issued bond represents the rate of return required by today's participants in the market place. B. When a bond's yield to maturity is less than its coupon rate, the bond is selling at a discount. C. The market prices of bonds with higher coupons are more sensitive to changes in market interest rates. D. The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.

D. A. That is yield B. No that is premium C. idk....

Which of the following statements is FALSE? A. When market yields rise, the price of discount bonds fall further below par or face value. B. When market yields rise, the price of long-term bonds fall by a greater percent than short-term bonds. C. When market yields rise, the price of bonds with small coupons fall by a greater percent than those with large coupons. D. When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.

D. When market yields rise, the bond price decreases. but a call provison in a bond grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price.