Finance Ch. 6, 7

Treasury bonds and treasury notes The US government borrows money by issuing:
It is the actual percentage change in the dollar value of an investment unadjusted for inflation. What is the nominal rate of return on an investment?
Changes in interest rates cause changes in bond prices. As an investor in the bond market, why should you be concerned about changes in interest rates?
They are issued by both corporations and governments. They are interest-only loans Which of the following are true of bonds?
The Fisher Effect The relationship between nominal rates, real rates, and inflation is called _____.
The pure time value of money and the relationship between nominal rates and time to maturity. The term structure of interest rates describes _____.
Changes over time and is usually not the same as a bond’s coupon rate A corporate bond’s yield to maturity:
$1,220900+320 If the present value of the interest payments on a bond is $320 and the present value of the par value to be paid at maturity is $900, the total value of the bond must be _____.
Equity is publicly traded while debt is not. Which of the following is not a difference between debt and equity?
Upward sloping, humped, and downward sloping. Which three of the following are common shapes for the term structure of interest rates?
The relationship between short-term and long-term interest rates The term structure of interest rates examines the _____.
They are issued by state and local governments; the interest on municipal bonds is exempt from federal taxes; the interest on municipal bonds is, in some cases, exempt from state taxes in the state of issue. Which of the following are features of municipal bonds?
0% If you are holding a municipal bond that is trading at par to yield 6%, by how much will your after-tax yield change if your federal income tax bracket increases from 15% to 20%. Assume there are no state or local taxes
Debentures (in the U.S.) and notes Bonds are classified based on the collateral provided to protect bondholders in case of default. Which of the following are unsecured forms of debt?
True True or false: The price you actually pay to purchase a bond will generally exceed the clean price.
The interest rate risk premium, the real rate of return, and expected inflation What are the three components that influence the Treasury yield curve?
The sensitivity of the bond’s price to interest rate changes The degree of interest rate risk depends on_____.
YTM is the expected return for an investor who buys the bond today and holds it to maturity.YTM is the prevailing market interest rate for bonds with similar features. What is a corporate bond’s yield to maturity (YTM)?
It is the number of years until the face value is paid off What is the definition of a bond’s time to maturity?
R = r + h What is the equation for approximating the nominal rate of return?R = the nominal rate of interestr = the real rate of interesth = the inflation rate
Yield to maturity, time remaining to maturity, par value, and coupon rate What four variables are required to calculate the value of a bond?
Current yield = annual coupon payment/current price What is a bond’s current yield?
Coupon rateTime to maturity The sensitivity of a bond’s rice to interest rate changes is dependent on which of the following two variables?
The firm is in a strong position to meet its debt obligations What does the AAA rating assigned by S&P mean?
It is the price at which a dealer is willing to sell a particular security.It is the price at which an investor can buy a particular security from a dealer. What is the asked price?
at 99.5 percent of face value plus any accrued interest If a $1,000 face value U.S. Treasury bond is quoted at 99.5, then the bond can be purchased _____.
The bond’s issuer may not be able to make all the required payments Bond ratings are based on the probability of default risk, which is the risk that _____.
$5,000 per bond A firm decides to raise money by issuing 5 million bonds with a par value of $5,000 each for 10 years at a coupon rate of 7 percent. At the time of issue, the bonds were sold for $5,500 each. What will the par value of the bonds be in year 5?
makes no interest paymnets A zero-coupon bond is a bond that _____.
decrease When interest rates in the market rise, we can expect the price of bonds to _____.
The maximum reward for owning debt is fixed.Equity represents an ownership interest. As a general rule, which of the following are true of debt and equity?
a fixed amount of interest that is paid annually or semiannually by the issuer to its bondholders A bond’s coupon payment is:
True True or false: In general, the price that is paid for a bond will exceed its quoted price.
$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years. ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?
It will decline What will happen to a bond’s time to maturity as the years go by?
Liquidity premiumDefault risk premium Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields?
5.25% What will your aftertax yield be on a corporate bond that is currently priced to yield 7 percent if you are in the 25 percent tax bracket?
a put bonda CoCo bonda convertible bond Which of the following are bonds that have actually been issued?
Many bond transactions are negotiated privately. Why is the bond market less transparent than the stock market?
Treasury bonds offer certain tax benefits to investors that corporate bonds cannot offer;Treasury bonds are free of default risk while corporate bonds are exposed to default risk.Treasury bonds are issued by the US government while corporate bonds are issued by corporations. Which of these correctly identify differences between Treasury bonds and corporate bonds?
Public issue and privately placed What are the two major forms of long-term debt?
U.S. Treasury issues are considered to be default-free.U.S. Treasury issues are exempt from state income taxes. What are the two unique features of a U.S. federal government bond?
They are rated below investment grade bondsThey have a high probability of defaultThey pay a high rate of interest Junk bonds have the following features:
Trading for more than $1,000 in the market. If a $1,000 par value bond is trading at a premium, the bond is:
lower than When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is _____ 6 percent.
Interest rate risk premiumReal interest rateInflation premium Which three components determine the shape of the term structure of interest rates?
focus exclusively on default risk A limitation of bond ratings is that they _____.
with a lag to some base rate Most of the time, a floating-rate bond’s coupon adjusts _____.
$1,0801,050 + 30 Suppose a bond’s clean price is $1,050, and the bond currently has accrued interest of $30. What is the dirty price?
Bonds that have both an investment grade and a junk bond rating What are crossover bonds?
Bonds that have dropped from investment grade to junk bond status What are “fallen angel” bonds?
The bond with a 5% coupon rate If you are holding two bonds – one with a 5% coupon rate and other with a 8% coupon rate – which one is more sensitive to interest rate risk, all other things being equal?
increases at a decreasing rate As the maturity of a bond increases, interest rate risk _____.
greater than If a bond is selling at a discount from its par value, the YTM must be _____ the coupon rate.
$75 * CH. 7What is the value of a stock if next year’s dividend is $6, the discount rate is 11 percent, and the constant rate of growth is 3 percent?
Dividend YieldGrowth rate In the dividend discount model, the expected return for investors comes from which two sources?
P1 = Price in one yearD1 – Next expected DividendR – Discount rateP0 – Price todayD0 = Dividend just paid Match the following terms relating to stock valuation.
a company’s own historical PEsthe PEs of similar companies A benchmark PE ratio can be determined using:
the current price The dividend yild is determined by dividing the expected dividend (D) by:
Non-constant This type of growth describes a company that grows quickly at first, then slower in future years.
The New York Stock ExchangeNASDAQThe Chicago Stock Exchange Examples of secondary markets in the U.S. include which of the following?
22.73(5+20)/(1+0.10) What is the price of a stock at the end of one year (P1) if the dividend for year 2 (D2) is $5, the price for year 2 (P2) is $20, and the discount rate is 10%?
distribution of corporate assetspayment of dividends Preferred stock has preference over common stock in the:
Pecialists New York Stock Exchange Designated Market Makers (DMMs) were formerly called _____.
Discount rateDividend What information do we need to determine the value of a stock using the zero growth model?
forward A PE ratio that is based on estimated future earnings is known as a _____ PE ratio.
DividendsCapital Gains Which of the following are cash flows to investors in stocks?
NASDAQ The two most important stock markets in the U.S. are the New York Stock Exchange and _____.
constant growthnon-constant growthzero growth Three special case patterns of dividend growth discussed in the text include:
11.78% What is the total return for a stock that currently sells for $50, just paid a $1.75 dividend, and has a constant growth rate of 8%?
The primary market is where stocks are issued for the first time. Which of the following defines the primary market?
The right to vote on matters of importance.The right to share proportionally in any residual value in the event of liquidation.The right to share proportionally in any common dividends paid. Which of the following are rights of common stock holders?
growth rate The _____ can be interpreted as the capital gains yield.
broker A person who brings buyers and sellers together is call a(n) _____.
dealer Someone who maintains an inventory of stocks and buys and sells those stocks is known as a _____.
The required rate of return is unobservableDividends are unknown and uncertainStock has no set maturity. Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?
internet Stock price reporting has increasingly moved from traditional print media to the _____ in recent years.
2/0.1 = 20.00 A zero-growth stock pays a dividend of $2 per share and has a discount rate of 10%. What will the stock’s price be?
Multiple market maker systemComputer network of securities dealers NASDAQ has which of these features?
400 If Joan owns 100 shares of ABC company and the company is electing 4 directors, under cumulative voting, Joan would usually have _____ votes.

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