FIN 330 CH 5 & 6 Test
higher EARs
More frequent compounding leads to
PV = PMT / r
Perpetuity formula
Maturity
years until the bond must be repaid
963.04
A bond has 5 years to maturity, a coupon rate of 10% and bonds of similar risk currently provide an 11% return in the market. What should the price for this bond be?
1196.36
A bond has a coupon rate of 10% and 20 years to maturity. Bonds of similar risk currently provide a yield of 8% in the market. What should the selling price of this bond be?
917.56
A bond with 7 years to maturity has a coupon rate of 14%which are paid semiannually. Bonds of similar risk currently provide a 16% yield in the market. What should this bond sell for?
coupon
A bonds ________ payment is a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders.
unsecured
A debenture is a(n) ______ bond, for which no specific pledge of property is made.
call provision
A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a ______.
Makes no interest payments
A zero coupon bond is a bond that __________
Principal
Amortization is the process of paying off loans by regularly reducing the ______.
the bond's issuer may not be able to make all the required payments
Bond ratings are based on the probability of default risk, which is the risk that ________________
Perpetuity
C/r is the formula for the present value of a(n)
Bond
Debt contract, interest only loan
Yield to maturity
Discount rate used to determine value of the bond
Annuity
Finite series of equal payments that occur at regular intervals
The bond with a 5% coupon rate
If you are holding two bonds—one with a 5 percent coupon rate and the other with an 8 percent coupon rate—which one is more sensitive to interest rate risk, all other things being equal?
Perpetuity
Infinite series of equal payments
1. Number of periods to maturity 2. YTM 3. Bond value or price 4. Coupon payment 5. Par value
N= I= PV = PMT = FV =
lower
The bonds of a firm in financial distress may have a market value that is __________ than the face value at maturity.
Ordinary annuity
The first payment occurs at the end of the period
- Coupon rate - Time to maturity
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
time to maturity and coupon rate
The sensitivity of a bond's price to interest rate changes is dependent on which of the following two variables?
false
True or false: A debenture is a bond secured with collateral. True false question.
True
True or false: Longer-term bonds have greater interest rate sensitivity because a large portion of a bond's value comes from the face amount.
True
True or false: Low-grade bonds are rated below investment grade by the major rating agencies.
false
True or false: The higher the coupon rate, the greater the interest rate risk, all other things being equal.
The firm is in a strong position to meet its debt obligations.
What does the AAA rating assigned by S&P mean?
A bond that sells for more than its face amount
What is a premium bond?
$1000
What is the assumed par value when none is given?
It is the number of years until the face value is paid off.
What is the definition of a bond's time to maturity?
Coupon rate * par
What is the equation for payment?
increase
When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows __________
decrease
When interest rates in the market rise, we can expect the price of bonds to _____.
Upward sloping
When long-term rates are higher than short-term rates, which of the following shapes will the term structure of interest rates usually have?
- The repayment arrangements - The total amount of bonds issued
Which of the following are usually included in a bond's indenture?
discount
_________ bonds are bonds that sell for less than the face value.
Par value
a bond's stated value, to be paid to the bondholder at maturity
bond price decreases
as Interest rate increases -->
bond price increases
as interest rate decreases
Annuity due
first payment occurs at the beginning of the period
