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Finance Flashcards

FINANCE CHAPTER 7

Bond prices are quoted in terms of which of the following? Original issue discountPERCENT OF PAR VALUECoupon rate in dollarsMarket rate in dollars
Which of the following determines the dollar amount of interest paid to bondholders? Original issue discountCall premiumCOUPON RATEMarket rate
Which of these statements is false? Bonds are more important capital sources than stocks for companies and governments.Some bonds offer high potential for rewards and, consequently, higher risk.The bond market is larger than the stock market.BONDS ARE ALWAYS LESS RISKY THAN STOCKS
Bonds are issued by which of the following? CorporationsFederal government or its agenciesState and local governments***All of these
Which of these statements answers why bonds are known as fixed income securities? Many investors on fixed incomes buy them.***Investors know how much they will receive in interest payments.Investors will not receive their principal when the bond’s term is up.All of these.
Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay? Call premiumMaturity date***Par or face valueTime to maturity value
To compensate the bondholders for getting the bond called, the issuer pays which of the following? Call feature***Call premiumCoupon rateOriginal issue premium
Which of the following issues Treasury Inflation Protected Securities (TIPS)? ***U.S. TreasuryCorporationsMunicipalitiesNonprofits
Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans? ***Asset-backed securitiesCredit quality securitiesDebenturesJunk bonds
Which of the following is NOT a factor that determines the coupon rate of a company’s bonds? The amount of uncertainty about whether the company will be able to make all the payments.The term of the loan.The level of interest rates in the overall economy at the time.***All of these are factors that determine the coupon rate of a company’s bonds.
Which of the following bonds makes no interest payments? A bond whose coupon rate is equal to the market interest ratesA bond whose coupon rates are greater than market interest ratesA bond whose coupon rates are less than the market interest ratesZero coupon bondtface
Which of the following is a true statement? ***If interest rates fall, U.S. Treasury bonds will have decreasing values.If interest rates fall, corporate bonds will have decreasing values.If interest rates fall, no bonds will enjoy rising values.If interest rates fall, all bonds will enjoy rising values.
Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? Credit quality risk***Interest rate riskLiquidity rate riskReinvestment rate risk
A bond’s current yield is defined as: the bond’s annual coupon rate divided by the bond’s par value.the bond’s annual coupon rate divided by the market interest rate.***the bond’s annual coupon rate divided by the bond’s current market price.the bond’s annual coupon rate divided by the bond’s original issue price.
Which of the following is a reason municipal bonds offer lower rates of interest income for their investors? They are able to avoid interest rate risk.They are able to avoid reinvestment rate risk.They are able to offer reduced credit risk as they are backed by the federal government.***They are tax exempt—at least at the federal level.
Which of the following terms is the chance that the bond issuer will not be able to make timely payments? ***Credit quality riskInterest rate riskLiquidity of interest rate riskTerm structure of interest rates
Which of the following bonds carry significant risk that the issuer will not make current or future payments? Credit quality risk bondsInterest rate risk bondsLiquidity rate risk bonds***Junk bonds
Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.) $2.50, $3.15, $0, respectively***$12.50, $15.75, $0, respectively$12.50, $15.75, $100, respectively$25.00, $31.50, $0, respectively
A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond’s time to maturity? (Assume annual interest payments.) 9 years***10 years19 years20 years
A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.) $1,000, $18.75, respectively$1,000, $37.50, respectively$1,181.46, $22.15, respectively$1,181.46, $37.50, respectively
Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars? $1,002.30, $1,000, $1,000, respectively$1,000, $1,000, $5,000, respectively$1,002.30, $994.50, $5,012.25 respectively***$1,029.38, $994.50, $5,122.50, respectively
Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.) ***$553.68$558.66$940.00$1,000.00
What’s the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70? ***5.9 percent6.0 percent6.1 percent10.2 percent
Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent. .JM bond, TC bond, B&O bond, IB bond***IB bond, B&O bond, TC bond, JM bondTC bond, B&O bond, IB bond, JM bondJM bond, IB bond, B&O bond, TC bond
Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond? ***discountpremium
A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.) 3.00 percent3.09 percent5.75 percent***6.00 percent
Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond? ***$685.93; discount$791.03; discount$1,051.83; premium$1,176.31; premium
Which of the following statements is correct? ***Bonds with short-term maturities will have very little interest rate risk.Bonds with large coupon payments will have very little interest rate risk.Bonds with higher credit ratings will have very little interest rate risk.All of these statements are correct.
Under what conditions is a bond likely to be called? The firm is in financial duress.The firm is planning a massive expansion and needs to raise a lot of capital.Interest rates have significantly declined.The firm wants to increase its debt ratio.

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