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FIN401 Exam 2 (Chapter 7)
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Key Concepts:
Terms in this set (23)
coupon
The stated interest payment, in dollars, made on a bond each period is called the bond's:
face value
The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
decreases; decreases.
All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____
$1,000; $35 : Because the bond is selling at par, its price is equal to the face value of $1,000. Since the bond pays coupon seminually, coupon = $1,000 * 7% / 2 = $35
A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.
greater than 6 percent but less than 7 percent
The newly issued bonds of the Wynslow Corp. offer a 6 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
a discount; higher than
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
current yield
The annual coupon payment of a bond divided by its market price is called the:
to realize a capital loss if you sold the bond at the market price today.
You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:
I, III, and IV only
American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.
yield to maturity
The rate of return required by investors in the market for owning a bond is called the:
Par value (face value)
The principle amount of a bond that is repaid at the maturity of the bond
coupon rate
annual interest payment as a percentage of face value
coupon
the interest payments paid to the bondholder
Present value decreases
As interest rates increase
Bond prices decrease
As interest rates increase
YTM=coupon rate
par value=bond price
YTM> coupon rate
par value is less than the bond price, selling at a discount
YTM< coupon rate
par value is greater than the bond price, selling at a premium
Experience more Price risk
Long-term bonds with low coupon rates
Experience more reinvestment rate risk
Short-term bonds with high coupon rates
Lower than 6.5%
YTM= 3.88%
Effective annual rate= 3.92% ((1+0.0194)^2))-1
Suppose that the bond with a 6.5% coupon rate and semiannual coupons, has a face value of $1000, 3 years to maturity and is selling for $1073.44 (asked Price).
Without calculation, will the yield by more or less than 6.5%
Calculate the YTM?
What is the effective annual yield on this bond?
Bond Pricing Theorm
Bonds of similar risk(and Maturity) will be priced to yield about the same return, regardless of the coupon rate.
If you know the price of one bond, you can estimate its YTM and use that to find the price of the second bond.
9.30% Cacluate YTM on current bond and they will be equal
Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 10% coupon bonds on the market that sells for $1,063, makes semiannual payments and matures in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?
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