finance test 2
The ________ is the expiration date of the bond.
maturity date
expiration date of bond when par value is paid back
maturity date
The fisher effect involves which of the items below?
nominal rate, the real rate and inflation
"Junk" bonds are a street name for ________ grade bonds.
speculative
Which of the statements below is false?
the prices of goods and services tend to decrease over time because of inflation (prices of goods and services ten to increase over time because of inflation)
Classification of fixed income securities
treasury corporate municipal securitized
Which of the following are issued with the shortest time to maturity?
treasury bills
Par Value
typically 1000
Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-coupon instrument
notes bonds bills
• Dealers• Investment Banks• Credit-rating agencies
intermediaries
• Governments• Pension Funds• Insurance companies• Foreign institutions
investors
the most common shape for a yield curve is upward sloping.
True
the annual rate based on interest being computed once a year.
APR
MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?
All of the above The bonds are selling at a premium to the par value. The bond market currently requires a rate (yield) less than the coupon rate. The coupon rate is greater than the yield to maturity
Regular interest payment received by holder per year.
Coupon
the true rate of return to the lender and true cost of borrowing to the borrower.
EAR
• Most corporate and government bonds pay coupons on a semiannual basis .• For computing price of these bonds, the values of the inputs have to be adjusted according to the frequency of the coupons (or absence thereof).
Semiannual bonds
Suppose you deposit money in a certificate of deposit (CD) at a bank. Which of the following statements is TRUE?
The bank is technically renting money from you with a promise to repay that money with interest
When interest rates are stated or given for loan repayments, it is assumed that they are ________ unless specifically stated otherwise.
annual percentage rates
A basis point is ________.
one-hundredth of a percentage point
Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?
when the interest rates go up bond prices go up
expected rate of return based on price of a bond
yield to maturity
Assume that you are willing to postpone consumption today and buy a certificate of deposit (CD) at your local bank. Your reward for postponing consumption implies that at the end of the year ________.
you will be able to buy more goods or services
Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.
80
Annual rat of interest paid
coupon rate
Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?
callable bond
A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.
long term debt
adjusts for the erosion of purchasing power caused by inflation.
real rate of interest
Known as "pure" discount bonds and sold at adiscount from face value •Do not pay any interest over the life of the bond. •At maturity, the investor receives the par value,usually $1000 .•Price of a zero-coupon bond is calculated by merely discounting its par value at the prevailing discount rate or yield to maturity.
Zero Coupon Bonds PMT = 0
The ________ is the regular interest payment of the bond.
coupon
the ________ is the interest rate printed on the bond.
coupon rate
When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value. Group of answer choices
coupon rate; discount to
The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
default premium
In constructing a yield curve you place interest rates on the vertical axis, and risk on the horizontal axis.
false (in constructing a yield curve place interstate's rates on the vertical axis and time to maturity on the horizontal axis)
Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.
fixed income
Governments, Corporations• Banks• Foreign institutions
issuers
To determine the interest paid each compounding period, we take the advertised annual percentage rate and simply divide it by the ________ to get the appropriate periodic interest rate.
number of compounding periods per year
The ________ is the face value of the bond. Group of answer choices
par value
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that ________.
the credit rating increases the default risk decreases and the required rate of return decreases
Which of the below is not a major component of interest rates?
historical interest rates
The ________ is a market derived interest rate used to discount the future cash flows of the bond.
yield to maturity
The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.
yield to maturity
the rate of interest earned on a risk-free investment such as a bank CD or a treasury security.
nominal risk free rate
Which of the following statements is FALSE?
Although an APR is quoted on an an annual basis, interest can be paid monthly but never daily (interest can be paid DAILY, even though it may not be a common mode of payment)
Which of the statements below is true?
The frequency of bankruptcy for a high-tech up-start firm is higher than for a blue-chip firm, so we see higher borrowing rates for start-ups than for mature firms.
