Which of the following are true regarding annuities? for an ordinary annuity, cash flows occur at the end of the period for an annuity due, cash flows occur at the beginning of the periodThe future value of an annuity due is greater than that of an ordinary annuity.
The more frequent the compounding the lesser the present value
the more frequent the compounding the greater the future value
The effective rate of interest will always be greater than or equal to the nominal rate
Hudson international wants to retire bonds they issued early (prior to maturity). Under what circumstances could the firm do this? The bonds are callable.
A bond rate AA is classified as investment grade
Which one of the following might be included in a bonds list of negative covenants? limiting cash dividends to $1 per share or less
as the coupon rate on a bond increases, the price (PV) of the bond increases
as the YTM on a bond increases, the price (PV) of the bond decreases
When the coupon rate > YTM, the price of the bond will be ______ the maturity value ($1000) greater than
a bond for which no specific property has been pledged as security is classified as a debenture
a bond that does not pay any interest payments and initially sells at a deep discount is called a zero coupon bond
generally, bonds issued in the US pay interest on a semiannual basis
A sinking fund is an account that is managed by a bond trustee for the sole purpose of redeeming bonds early.
Compound interest
simple interest
bond source of long-term debt financing
bond features you or another company lends money to the borrower and get back your original investment plus interest
interest is determined by a coupon rate
par value also face or maturity value
current market price & coupon payment typically quoted as % of par
sinking fund an account managed by a trustee that allows for the gradual retirement/payoff redemption of bonds prior to maturity.
zero coupon bonds no interest payments. face value is paid at maturity deep discount bonds
ytm the rate you expect to earn if you hold the bond until maturity
current yield annual coupon payment/ current market price
yield curve graphical representation of the term structure normal- upward slopinginverted- downward sloping
premium bonds over 1000
discount bonds less than 1000
fisher effect defines the relationship between real rate, nominal rate, and inflation rate.
fisher equation (1+R)= (1+r) (1+h)
bid ask spread ask price- bid price
clean price
dirty price
present value money earlier on a time line
future value $ later on a time line, how much is an investment worth at some point in the future
fv after 2 years with simple interest 1000+50+50= 1100
fv after 2 years with compound interest $1102.50. the extra 2.50 comes from the interest of $2.50 earned on the first interest payment or the “interest on interest”
annuity finite series of equal cash flows at regular intervals.
annuity due beginning of the period
ordinary annuity payment occurs at the end of the period
perpetuity infinite series of equal cash flows at regular intervals.example: british consol (band) scholarships
EAR actual rate paid (or recieved after accounting for compounding that occurs during the year)
APR annual rate quoted on all loans (by law) periodic rate * m periodic rate= APR/M

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