Finance Chapter 7 Book Questions
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount.
PV= -(current bond price)
Which one of these defines yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market rate of interest
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value
What is the definition of yield to maturity?
The rate that will be earned is a bond is purchased today and held until maturity
Why are US Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the US government
What is the purpose of a call premium?
To compensate bondholders who have their bonds redeemed prior to maturity
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bond.
True
Which one of the following types of bonds is used to implement national monetary policy?
US Treasury bonds
Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
US government bond with an inflation-adjusted par value and varying interest payments
What is an indenture agreement?
a legal contract between the issuer and the bondholders
Which one of these is the current yield formula?
annual interest /current value
An investor buys bonds at the ____ price and sells them at the _____ price.
ask;bid
The funding of which one of these would be provided by a general obligation municipal bond?
city school
Which of these is correct if a bond is selling at a premium?
coupon rate > coupon rate > yield to maturity
What does a bond rating measure?
credit quality, or default risk
Which of the following yields or rates are inversely related to a bonds market price?
current yield and yield to maturity only
Mortgage-backed securities are repaid from which funding source?
homeowners' mortgage payments
Which specific characteristics identifies a security as an asset-backed security?
repayment based on a pool of debt securities
Which one of these is a key reason why issuers call bonds?
significant drop in market interest rates
What is a call premium?
the additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity
Which of these statements is correct?
the average daily trading volume of US bonds reached over $730 billion
What is interest rate risk?
the chance that a bond's value will decline due to a rise in market interest rates
Which statement related to bonds is true?
bonds have varying levels of risk
Which one of these explains why issuers call bonds?
to refinance debt at a lower rate
Which of the following are sources of information on the bond markets?
- the Wall Street Journal -Internet -Merrill Lynch
How much will you pay to purchase a $100,000 US Treasury bond that is quoted at $99.6250?
99.6250 x 100,000= $99,625.00
For a typical bond, which of the following values are expressed in semiannual terms when computing the yield to maturity?
-Number of time periods, N -Discount rate, or rate of return, I -Interest payments, PMT
Which of the following are commonly included in an indenture agreement?
-call premium -par value -coupon rate
Which of the following securities pay income which is exempt from federal income taxes?
-county bond to build a school -state bond to build a highway
The market rate of interest that is used to compute the present value of a bond is affected by which of the following?
-credit quality of the bond -tax status of the bond
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise?
-face value= $1000 -semiannual interest payments
Which of these statements are correct?
-if the market interest rate rises, bond prices will fall, and yield to maturity will rise -a treasury bond should have a higher yield to maturity than a comparable muni bond
Which of the following may be financed with corporate bonds?
-inventory -plant and equipment -research and development
Which of the following apply to high-yield bonds?
-low-quality -increased credit risk
Which of these characteristics apply to a discount bond?
-market price is less than the principal amount of the loan -selling for less than face value
Which of the following affect the coupon rate a firm must set on bonds if the bonds are to be sold at par?
-market rates of interest -bond term -default risk
Which of the following are classified as asset-backed securities?
-mortgage-backed securities -security repaid from a group of credit card loans -debt-security with payments originating from a pool of auto loans
Which of these are common features of a corporate bond?
-publicly traded debt securities -face value of $1,000 -semi-annual interest payments
Which of these statements correctly applies to the NYSE bond market?
-the NYSE operates the largest centralized US bond market -corporate bonds are the primary source of bond trading volume on the NYSE
Which of the following correctly explains how a factor affects interest rate risk?
-the longer the term to maturity, the greater the interest rate risk -the lower the coupon rate, the greater the interest rate risk
How does yield to call differ from the yield to maturity for the same bond?
-there are fewer time periods in the yield to call -the call price used in the yield to call typically exceeds the face value used in the yield to maturity
What is the shortest maturity period for a newly issued US Treasury bond?
10 years
Which of the following bonds is subject to the greatest interest rate risk?
10-year, zero coupon
A corporate bond pays $45 in interest every six months and matures in 11 years. What is the rate of maturity if the bond currently sells for $1,213?
6.29 percent
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3 what is the yield to maturity?
7.2547 percent
What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments
You manage a trust fund and have a fiduciary responsibility to only purchase investment grade bonds. Which bond rating indicates a bond you could not purchase?
BB
If a bond is selling at a premium which one of these rates will be the highest?
Coupon rate
True or false: Interest rate is only a concern when market interest rates decline.
False -Interest rate risk is a concern when market rates increase since increasing interest rates cause bond prices to decline
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the US economy
One type of high-yield bond is a fallen angel. How is this type of bond defined?
Junk bond that was originally issued as an investment-grade bond
What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
Most secondary trades in the US bond market occur between which two parties?
bond dealers and large institutions
What is the yield spread?
difference between the yields to maturity on bonds with differing levels of credit risk
Speculative bonds are frequently referred to as which type of bonds?
junk bonds
Which one of these characteristics designates a premium bond?
market price exceeds par value
Where does the majority of trading volume in bonds in the secondary markets occur?
over-the-counter (decentralized)
Which of the following should be used to compare various corporate bonds if you plan to purchase a bond today, hold it until maturity, and want to select the bond with the highest rate of return?
yield to maturity