FIN MGT TEST 3
If you invest in a $1000 corporate bond that has a 9% coupon and makes semi-annual payments, you can expect to receive____.
$45 every 6 months
A bond pays annual interest payments of $50, has a par value of $1000, and a market price of $1200. How is the coupon rate computed?
$50/$1000
What is the effective annual rate for a bond with a 7% yield to maturity that makes semi-annual interest payments?
7.12%
If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be _____.
$1220
A corporation issues 50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7%. what will be the total interest expense for the corporation?
$3.5 million
What is true about a bond's face value?
1. it is known as the par value 2. it is the principal amount repaid at maturity.
What terms apply to a bond?
1. par value 2. time to maturity 3. coupon rate
What variables are required to calculate the value of a bond?
1. remaining life of bond 2. coupon rate 3. market yield
What institutions issue bonds that are traded in the bond market?
1. state governments 2. federal government 3. public corporations
What are 3 important features of Treasury notes and bonds?
1. taxable 2. highly liquid 3. default-free
What two prices can be found in the Wall Street Journal's daily Treasury bond listing?
1. the bid price 2. the asked price
How is an APR computed?
rate per period x number of periods per year
If a given set of cash flows is expressed in nominal terms and discounted at the nominal rate, the resulting present value will be the same as if the cash flows were expressed in real terms and discounted at the ____ rate.
real
As an investor in the bond market, why should you be concerned about changes in interest rates?
Changes in interest rates cause change in bond prices
What are some reasons why the bond market is so big?
1. Federal government borrowing activity in the bond market is enormous 2. various state and local governments also participate in the bond market 3. many corporations have multiple bonds issues outstanding
What 6 factors determine the yield on a bond?
1. Liquidity 2. expected future inflation 3. default risk 4. real rate of return 5. interest rate risk 6. taxability
What is a corporate bond's yield to maturity (YTM)?
1. YTM is the expected return for an investor who buys the bond today and holds it to maturity 2. YTM is the prevailing market interest rate for bonds with similar features
What is true about interest rate risk?
1. all else equals, the longer the time to maturity, the greater the interest rate risk 2. all else equal, the lower the time to maturity, the greater the interest rate risk
What are the 3 components of the nominal rate of return?
1. compensation for the inflation effect on the investment earnings 2. compensation for the inflation effect on the original investment 3. real rate of return
What is included in the calculation of a bond's yield to maturity?
1. current price 2. coupon rate 3. par value
What 3 things are common shapes for the term structure of interest rates?
1. humped 2. upward sloping 3. downward sloping
What are the 3 components of the Treasury yield curve?
1. interest rate risk premium 2. expected inflation 3. real rate of return
What 3 components determine the shape of the term structure of interest rates?
1. interest rate risk premium 2. inflation premium 3. real interest rate
What is required to calculate the current value of a bond?
1. time remaining to maturity 2. coupon rate 3. applicable market rate 4. par value
Use your calculator to find the YTM on a 20 year $1000 par value bond that pays coupons of 4.5% semi-annually and currently sells for $1104.89.
3.75%
If the rate of inflation is 3% and the real rate of return is 5%, the nominal rate is approximately ____%?
8%
Which of the following is true about a multi-year typical bond's coupon?
It is a fixed annuity payment
What is the definition of a bond's time to maturity?
It is the number of years until the face value is due to be repaid.
What is a real rate of return?
It is the rate of return that has been adjusted for inflation.
What is the nominal rate of return on investment?
It is the rate that has not been adjusted for inflation
Which has a higher value, the bid price quote or the asked price quote?
The asked price quote is higher
Why does a bond's value fluctuate over time?
The coupon rate and par value are fixed, while market interest rates change.
Which is more transparent, the stock market or the bond market?
The stock market is more transparent
A bond has a quoted price of $984.63, a face value of $1,000, a semi-annual coupon of $20, and a maturity of 10 years.
YTM= 4.11% Current Yield= 4.06%
A bond's YTM will exceed its current yield when the bond is selling at ____.
a discount
A corporate bond's yield to maturity______.
changes over time and can be greater than, equal to, or less than the bond's coupon rate
What is a bond's current yield?
current yield = annual coupon payment/current price
When interest rates in the market rise, we can expect the price of bonds to ____.
decrease
In an inflationary environment, the nominal rate will be _____ the real rate.
greater than
In general, a corporate bond's coupon rate _____.
is fixed until the bond matures
What is the bid price?
is the price at which the dealer is willing to buy securities
What will happen to the default risk premium during periods of economic uncertainty?
it will increase
A market is considered transparent if_____?
its prices and trading volume are easily oberseved
If a $1000 par value bond is trading at a discount, it means that the market value of the bond is _____$1000.
less than
The reason that interest rate risk is greater for ______ term bonds than for ______ term bonds is that the change in rates has a greater effect on the present value of the _____ than on the present value of the ______.
long; short; face value; coupon payments
All else held constant, the yield on a highly liquid bond will be ____ the yield on an illiquid bond.
lower than
The degree of interest rate risk depends on _____.
the sensitivity of the bond's price to interest rate changes
If a $1000 par value bond is trading at a premium, the bond is:
trading for more than $1000 in the market