Finance Exam 2

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Bare Trees United issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM?

9.53%

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Coupon Rate

A bond's principal is repaid on the ____ date.

Maturity

Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

N = 19*2; I/Y = 8.2/2; Pmt = 102/2; FV = 1000; Compute PV = 1,190.93

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

A call-protected bond is a bond that:

cannot be called during a certain period of time

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

force the issuer to repurchase the bond prior to maturity

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default Risk

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

Face Value

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

call premium

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

cannot lease any major assets without bondholder approval

The interest rate risk premium is the:

difference between the yield to maturity and the current yield

A "fallen angel" is a bond that has moved from:

investment grade to speculative grade

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

market price of the bond will decrease

Municipal bonds:

pay interest that is federally tax-free