Finance SmartBook Ch 6

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A sukuk is a contract related to:

- Islamic law - riba

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest; r = the real rate of interest; h = the inflation rate.

R = r + h

The coupon payments on floating-rate bonds are _____________.

adjustable

If bonds for AT&T are quoted at 115, they can be purchased:

at 115 percent of par value plus accrued interest

As an investor in the bond market, why should you be concerned about changed in interest rates?

changes in interest rates causes changes in bond prices

A bond with a BB rating has a __________ than a bond with a BBB rating.

higher risk of defualt

What is the most important source of risk from owning bonds?

market interest rate fluctuations

What are the two major forms of long-term debt?

private and public issue

The term structure of interest rates examine the ______________________.

relationship between short-term and long-term interest rates

If a bond is issued with a call provision, it allows the issuer to _________________ part or all of the bond at defined prices and times.

repurchase

What does historical data suggest about the nature of short-term and long-term interest rates?

sometimes short-term rates are higher and sometimes long-term rates are higher

What does a bond's rating reflect?

the ability of the firm to repay its debt and interest on time

Bond ratings are based on the probability of default risk, which is the risk that __________________.

the bond's issuer may not be able to make all the required payments

What does the AAA rating assigned by S&P mean?

the firm is in a strong position to meet its debt obligations

What are some features of the OTC market for bonds?

- OTC dealers are connected electronically - the OTC has no designated physical location

What is a corporate bond's yield to maturity (YTM)?

- YTM is the prevailing market interest rate for bonds with similar features - YTM is the expected return for an investor who buys the bond today and holds it to maturity

What are some bonds that have actually been issued?

- a put bond - a convertible bond - a CoCo bond

A corporate bond's YTM...

- changes over time - is usually not the same as a bond's coupon rate

What terms apply to a bond?

- coupon rate - par value - time to maturity

A key difference between interest payments and dividend payments is:

- interest is tax deductible - dividends are not tax deductible

What is the asked price?

- it is the price at which an investor can buy a particular security from a dealer - is is the price at which a dealer is willing to sell a particular security

What is the real rate of return?

- it's a percentage change in buying power - it's a ROR that has been adjusted for inflation

What is the bid price?

- it's the price at which the dealer is willing to buy securities - it's the price an investor will receive if he or she sells a bond to a dealer

As a general rule, what is true of debt and equity?

- the maximum reward for owning debt is fixed - equity represents an ownership interest

What are the 3 components that influence the Treasury yield curve?

- the real rate of return - the interest rate risk premium - expected future inflation

The term structure of interest rates describe:

- the relationship between nominal rates and time to maturity - the pure time value of money

What is true of bonds?

- they are issued by both corporations and governments - they are normally interest-only loans

If a $1,000 face value US Treasury bond is quoted at 99.5, then the bond can be purchased __________________.

at 99.5 % face value plus any accrued interest

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

As an investor in the bond market, why should you be concerned about changes in interest rates?

changes in interest rates cause changes in bond prices

The bid-ask spread represents the _______________.

dealer's profit

When interest rates in the market rise, we can expect the price of bonds to _______________.

decrease

What is NOT a different between debt and equity?

equity is publicly traded, while debt is not

When interest rates in the market fall, bond values will increase because the present value of the bond's remaining cash flows _______________.

increases

The degree of interest rate risk depends on _________________.

the sensitivity of the bond's price to interest rate changes

What is the purpose of a sinking fund?

to create a fund to repay bonds when they fall due

The US Gov't borrows money by issuing _______________.

treasury notes and bonds

It is true of the bond _____________ to manage the sinking fund so that bonds can be repaid.

trustee

Most of the time, a floating-rate bond's coupon adjusts ________________.

with a lag to some base rate

What is a bond's current yield?

Current Yield = Annual Coupon Pmt/Price

A put bond allows the holder to force the issuer to buy the bond back at a stated price. T/F

True

Long-term debt has maturities greater than one year. T/F

True

The Gov't sells treasury notes and bonds to the public every month. T/F

True

A Sukuk is in compliance with Islamic law as the financing instrument is not charging any _______________ or making money from money.

interest

What does a Treasury yield curve show?

it shows the yield for different maturities of Treasury notes and bonds

What is the nominal rate of return on an investment?

it's the actual percentage change in the dollar value of an investment unadjusted for inflation

A zero coupon bond is a bond that ______________.

makes no interest payments

Why is the bond market less transparent than the stock market?

many bond negotiations are negotiated privately

Equity represents a(n) __________________ interest of a firm.

ownership


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