Fin Ch. 6
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?
$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.
A corporate bond's yield to maturity:
- is usually not the same as a bond's coupon rate - changes over time
Which of the following variables is not required to calculate the value of a bond?
-Original issue price of bond (Need: market yield to maturity, coupon rate, remaining life of bond)
Which of the following are true of bonds?
-They are issued by both corporations and governments -They are normally interest-only loans
As a general rule, which of the following are true of debt and equity?
-equity represents an ownership interest -the max reward for owning debt is fixed
True or false: current yield = annual coupon payment / price
True
True or false: long term debt has maturities greater than one year
True
A protective covenant is part of an indenture or loan agreement that limits certain actions a company may take during the term of the loan to _____the lender's interests
Protect
If a bond is issued without a call provision, it allows the issuer to ______ part or all of the bond at defined prices and times
Repurchase
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?
The 10 year bond (longer maturity and lower coupon --> more sensitive)
Which of the following are usually included in a bond's indenture?
The total amount of bonds issued The repayment arrangements
To find the total bond value, add the present value of the amount paid at maturity to the _____ of the annual coupon payments.
annuity present value
A key difference between interest payments and dividend payments is:
dividends are not tax deductible interest is tax deductible
A limitation of bond ratings is that they ____.
focus exclusively on default risk
The degree of interest rate risk depends on ____.
the sensitivity of the bond's price to interest rate changes
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
What is the purpose of a sinking fund?
to create a fund to repay bonds when they fall due
What does a bond's rating reflect?
The ability of the firm to repay its debt and interest on time
When interest rates in the market fall, bond values will increase because the present value of the bonds remaining cash flows
increases
Equity represents a(n) _____ interest of a firm.
owners
A part of the indenture limiting certain actions during the term of the loan are termed ________.
protective covenants
What is a corporate bond's yield to maturity?
The yield to maturity is the prevailing market interest rate for bonds with similar features. It is also the expected return in for an investor who buys the barn in order to maturity.
What are the two major forms of long - term debt?
public issue and private issue
It is the duty of the bond _____ to manage the sinking fund so that bonds can be repaid.
trustee
What four variables are required to calculate the value of a bond?
yield to maturity, coupon rate, par value, time remaining to maturity
If a bond is issued with a ______ provision it allows the issuer to repurchase part or all of the bond at defined prices and times
Call
What is a bond's current yield?
Current yield = annual coupon payment / current price
When rates in the market rise, we can expect the price of bonds to
Decrease
Which one of the following is the most important source of risk from owning bonds?
Market interest rate fluctuations
Which of the following terms apply to a bond?
Time to maturity, coupon rate, par value
