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Finance Flashcards

Finance Ch 4

A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be greater than 8%.
A bond that grants the investor the right to exchange their bonds for common stock, is called a convertible bond.
Of the following bonds, which one has the highest degree of interest rate risk? 20 year 8% bond
Which of the following information cannot be found in a bond’s indenture? The price of the bond.
Bonds issued by US states or local governments are called… Municipal bonds.
The value of any asset equals the present value of future benefits accruing to the asset’s owner.
The greater the uncertainty about an asset’s future benefits, the higher the discount rate investors will apply when discounting those benefits to the present.
A bond’s coupon rate equals its annual coupon payment divided by its par value.
Unsecured bonds that have legal claims inferior to other outstanding bonds are subordinated debentures.
With respect to the company that has issued a callable bond, the value of the call increases as interest rates decrease.
With respect to the owner of a putable bond, the value of the put increases as interest rates increase.
You read in the financial press that a company’s Moody’s debt rating is one step above junk. What is the rating? Baa3
You are trying to find the correct yield spread for a Standard and Poor’s rated A+, 7-year maturity bond. You find that a 7-year maturity, AA- bond’s spread is 65 basis points while that of a 7-year maturity A bond’s spread is 80 basis points. Which of the following should be a possibility for the spread of the A+ rated bond? 70 basis points
The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as the term structure of interest rates.
if you were trying to describe the effect on the yield curve that certain investors have a definite preference for the maturity of the bonds that they invest in, then you would be referring to the preferred habitat theory.
Suppose investment A and investment B have identical cash flows. Why would an investor pay more for investment A than investment B? The risk in the cash flows for investment B is greater than the risk of the cash flows of investment A.
Which answer is FALSE regarding bond prices and interest rates? The prices of short-term bonds display greater price sensitivity to interest rate changes than do the prices of long-term bonds.
A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are examples of what type of bond? Agency bond
Which type of bond has the highest daily trading volume in our economy? Treasury bonds
What is the minimum rating required for a bond to be considered investment grade? BBB
Which of the following statements are CORRECT? Statements I and II only-Statement I:A change in a bond’s interest rate risk has a greater price impact on bonds with longer maturities.Statement II:Government bonds have lower default risk than corporate bonds or municipal bonds.

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