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Financial Management Chapter 7
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Terms in this set (124)
Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?
Coupon
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
Face Value
A bond's coupon rate is equal to the annual interest divided by which one of the following?
Face Value
The bond principal is repaid on which one of these dates?
Maturity Date
The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?
Yield to Maturity
The current yield is defined as the annual interest on a bond divided by which one of the following?
Market Value
Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?
List of collateral used as bond security
Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
In registered form
A bond that is payable to whomever has physical possession of the bond is said to be in:
Bearer form
Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
Debenture
A note is generally defined as
An unsecured bond with an initial maturity of 10 years or less
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
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
A deferred call provision is which one of the following?
Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.
A call-protected bond is a bond that
Cannot be called at this point in time
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
Protective covenants
A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?
Zero coupon
Which one of the following is the price at which a dealer will sell a bond?
Asked price
If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive?
Bid price
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
Spread
A bond is quoted at a price of $1,011. This price is referred to as the:
Clean Price
Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:
Dirty price
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
Interest rates that include an inflation premium are referred to as:
Nominal rates
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
The pure time value of money is known as the:
Term structure of interest rates
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
The interest rate risk premium is the:
Compensation investors demand for accepting interest rate risk
A Treasury yield curve plots Treasury interest rates relative to which one of the following?
Maturity
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
Liquidity
The taxability risk premium compensates bondholders for which one of the following?
A bond's unfavorable tax status
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent?
The current yield exceeds the coupon rate
A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?
Yield to maturity less than the coupon rate
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
discount; less than
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.
Which one of the following applies to a premium bond?
Coupon rate > current yield > yield to maturity
Which one of the following relationships applies to a par value bond?
Coupon rate = current yield = yield-to-maturity
Which one of the following relationships is stated correctly?
Decreasing the time to maturity increases the price of a discount bond, all else constant.
Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?
The bonds will sell at a premium if the market rate is 5.5 percent.
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
Greater than 7 percent
The price sensitivity of a bond increases in response to a change in the market rate of interest as the:
Coupon rate decreases and the time to maturity increases
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
Increases at a decreasing rate.
You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?
You will realize a capital gain on the bond if you sell it today
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
Long-term; zero coupon.
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield-to-maturity is less than the coupon rate.
Which one of these statements is correct?
Bonds provide tax benefits to issuers
Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?
It has a "make whole" call price.
Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?
Note
Callable bonds generally:
Have a sinking fund provision.
Which one of these is a negative covenant that might be found in a bond indenture?
The company cannot lease any major assets without bondholder approval.
Protective covenants:
Are primarily designed to protect bondholders
Which one of the following statements concerning bond ratings is correct?
Split-rated bonds are called crossover bonds.
A "fallen angel" is a bond that has moved from:
Investment grade to speculative grade
Bonds issued by the U.S. government:
Are considered to be free of default risk
Treasury bonds are:
Generally issued as semiannual coupon bonds.
Municipal bonds:
Pay interest that is federally tax free
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
.05 / (1 - t*) = .07
A zero coupon bond:
Has more interest rate risk than a comparable coupon bond
Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?
Interest rate risk
The collar of a floating-rate bond refers to the minimum and maximum:
Coupon rates
Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?
Maintained a fixed real rate of return
Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to:
Convert the bond into equity shares
Cat bonds are primarily designed to help:
Insurance companies fund excessive claims.
Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
7- year income bond.
Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?
5-year TIPS
Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?
Warrant
U. S. Treasury bonds:
Are quoted as a percentage of par
A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?
Two month's interest.
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?
Dirty Price
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
Real rate
Which one of the following statements is correct?
The real rate must be less than the nominal rate given a positive rate of inflation.
The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.
Inflation
You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?
Comparable real rate.
Which one of the following statements is false concerning the term structure of interest rates?
The term structure of interest rates and the time to maturity are always directly related.
The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:
Taxes and default risk
Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this?
Structured note.
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity?
6.48 percent
You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,062.50. The bond matures in 11 years. What is the yield to maturity?
5.62 percent
New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $972. Interest is paid semiannually. What is the yield to maturity?
5.92 percent
Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?
$975.93
Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?
$967.24
Luxury Properties offers bond with a coupon rate of 9.5 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?
$893.99
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?
5.73 years
World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?
12.53 years
You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?
$182.80
Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest.
807.86
The zero coupon bonds of JK Industries have a market price of $211.16, a face value of $1,000, and a yield to maturity of 7.39 percent. How many years is it until these bonds mature?
21.43 years
A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?
1.79 percent decrease
The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
The bond price will decrease by 1.92 percent.
Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have a 7 percent coupon rate. What is the current yield on these bonds?
8.07 percent
The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield?
6.42 percent
The 7 percent, semiannual coupon bonds offered by House Renovators are callable in two years at $1,054. What is the amount of the call premium on a $1,000 par value bond?
$54
A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000?
$1.50
A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?
$987.00
A Treasury bond is quoted at a price of 105.4620. What is the market price of this bond if the face value is $5,000?
$5,273.10
A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond?
6.38 percent
A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield?
4.85 percent
A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield?
3.21 percent
A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $5,000 face value bond?
$25.375
The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?
$42.25
A bond that pays interest annually yielded 6.48 percent last year. The inflation rate for the same period was 2.5 percent. What was the actual real rate of return?
3.88 Percent
A bond has a yield to maturity of 11.68 percent. If the inflation rate is 3.2 percent, what is the real rate of return on the bond?
8.22 Percent
The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent. If the current rate of inflation is 4.68 percent, what is the actual nominal rate of return on these bonds?
10.54 percent
The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation?
6.34 percent
A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life?
$18.70
Global Exporters wants to raise $29.6 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 7.75 percent. What is the minimum number of bonds it must sell to raise the money it needs?
135,436
You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 10.725 percent and the inflation rate is 3 percent. What are your winnings worth today in real dollars?
$20,229
You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 9.897 percent and the inflation rate is 2.9 percent. What is the present value of these payments in real dollars?
$21,072
A $1,000 face value bond has a coupon rate of 7 percent, a market price of $911.02, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.8 percent, what is the yield-to-maturity when expressed in real terms?
5.38 Percent
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?
12.00 percent
Dexter Mills issued 20-year bonds a 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 on these bonds is 9.2 percent, what is the current bond price?
$1,089.02
Bare Trees United issued 15-year bonds 2 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM?
8.68 Percent
Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate?
6.40 percent
Suppose the real rate is 2.45 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill?
4.29 percent
An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year?
2.46 percent
A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what will be the percentage change in the bond price?
-10.02 percent
Sunset Sales has 7.2 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield?
7.52 Percent
Bonner Metals wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent bonds on the market that sell for $959, make semiannual payments, and mature in 16 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?
8.99 Percent
You purchase a bond with an invoice price of $1,319. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are two months to the next semiannual coupon date. What is the clean price of this bond?
$1,298.17
You want to have $2 million in real dollars in an account when you retire in 43 years. The nominal return on your investment is 9.939 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?
$9,210
The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a 9 percent annual coupon bond for $1,000. The bond has 12 years to maturity. Three years from now, the yield-to-maturity has declined to 7 percent and you decide to sell. What is your holding period yield?
12.83 Percent
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