Why would an investor pay more for investment A than investment B? This is incorrect. You would always pay the same amount for two investments with equal future cash flows. The risk in the cash flows for investment A is greater than the risk of the cash flows of investment B.
The risk in the cash flows for investment B is greater than the risk of the cash flows of investment A. The return required for investment B is lower than the return required for investment A.
2) Key Bond Characteristics
What is the coupon yield of the bond currently? Consider the following details for a bond issued by Bravo Incorporated. Bond prices and interest rates move in opposite directions. The price of a bond is the present value of the coupon payments and the face value. The prices of short-term bonds display greater price sensitivity to interest rate changes than do the prices of long-term bonds.
What is the real return for this investment? Treasury bond b. Corporate bond c. Municipal bond d. Agency bond ANS: D PTS: The Treasury Department sells a zero-coupon bond that will mature in two years. What is the annual return for an investor buying the bond? A bond is trading on the secondary market and will mature in 10 years.
Which type of bond has the highest daily trading volume in our economy? Treasury bonds b.
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Agency bonds c. Corporate bonds d. Municipal bonds ANS: What is the yield to maturity for this bond? What is the coupon yield for this bond? Given Exhibit , what is the current ask yield of the Big City bond? Given Exhibit , what is the current coupon yield of the Big City bond? What is the minimum rating required for a bond to be considered investment grade?
A corporate bond has a coupon rate of 9 a face value
BBB d. BB ANS: Your friend wants you to invest in his new sporting goods store. All payments are at the end of the year. How much are you willing to loan him today for his new store? A one-year Treasury security currently returns a 4. A two-year Treasury security offers a 4. If the expectations hypothesis is true, what is the expected return on a one-year security next year? What is the new coupon payment for this bond? Suppose you have a chance to buy a Treasury strip. What is the price you are willing to pay for this strip? Over the last 4 years, the company has experienced financial difficulty as the long distance market has grown more competitive.
Refer to EarthCOM.
Fina312 - Quiz 4 - Chapter 14
Suppose that today October 4th, , EarthCOM admits to fraud in reporting revenues over the last 3 years. What is the new yield-to-maturity on EarthCOM bonds? Express as an APR a.
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Statement I: Statement II: Government bonds have lower default risk than corporate bonds or municipal bonds. Statement III: Trading volume is greater for corporate bonds than government bonds. Statement I only b. Statement II only c. Statements I and II only d. Which of the following statements is false? The valuation process involves linking an asset's past benefits and uncertainty to determine a fair present value. Holding future benefits in the form of cash flows constant, the riskier the benefits the higher the estimated present value.
Finance theory focuses primarily on intangible benefits expected from an asset. All of the above statements are true. All of the above statements are false. E PTS: The required rate of return: Both a and b e. All of the above ANS: Additional features offered by bonds may include: All of the above e.
Both a and c ANS: Both b and d ANS: The monthly payment will occur at the end of the month and you plan to pay off the mortgage over a year period at a 6. None of the above ANS: Which of the following statements is true? As time passes and a bond approaches its maturity date the price will converge to par value plus the final interest payment.
The most important factor having an impact on a bond's price is the current yield on the bond. Bond prices and interest rates move in the same direction. Shorter-term bonds are more sensitive to changes in interest rates than longer-term bonds. None of the above statements is true. Bond ratings: Both b and c e. Yield spreads are quoted in terms of basis points.
Which of the following is true for basis points? The yield curve: Both b and c ANS: The buyer of a bond will buy at the asked price and will also be invoiced for any accrued interest due to the seller. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August D ratings are risky bonds.
The bond market…. The bond market, unlike the stock market, can be a very thinly traded market. In addition, most bonds are traded by dealers. Ceteris paribus, the price and yield on a bond are.. Negatively related, bond prices and yields are inversely related. The current yield is the annual interest as a percent of current market price; the other choices do not apply to bonds.
Conversion ratio, the conversion premium is the amount for which the bond sells above conversion value; the price of bond as a straight bond provides the floor. The other terms are not specifically relevant to convertible bonds. A coupon bond will pay the coupon rate of interest on a semiannual basis unless the firm defaults on the bond. Convertible bonds are specific types of bonds. Any bond may be redeemed prior to maturity, but all bonds other than put bonds are redeemed at a price determined by the prevailing interest rates.
Callable bonds…. Callable bonds often are refunded called when interest rates decline appreciably. A treasury bond due in one year has a yield of 5. A bond issued by Ford Motor Company due in 5 years has a yield of 7. The default risk premiums on the bonds issued by Shell and Ford, respectively, are…. A Treasury bond due in one year has a yield of 4. A bond issued by Lucent Technologies due in 5 years has a yield of 8.
The default risk premiums on the bonds issued by Mobil and Lucent Technologies are: A Treasury bond due in one year has a yield of 6. A bond issued by Xerox due in 5 years has yield 7.
A corporate bond has a coupon rate of 9 a face value of and matures in 15
The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are…. A bond issued by Boeing due in 5 years has yield of 7. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are 2. Floating rate bonds allow the investor to earn a rate of interest income tied to current interest rates, thus negating one of the major disadvantages of fixed income investments. Convertible bonds allow the investor to benefit from the appreciation of the stock price, either by converting to stock or holding the bond, which will increase in price as the stock price increases.
The yield to maturity on this bond is…. When a bond sells at par value, the coupon rate is equal to the yield to maturity. You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity. The amount you paid for this bond one year ago was…. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time. Consider two bonds, A and B. Bond A will mature in 5 years, while bond B will mature in 6 years. Both bonds will increase in value, but bond B will increase more than bond A.
The longer the maturity, the greater the price change when interest rates change. What would your rate of return at the end of the year be if you sell the bond? The price the bond should sell for today is…. You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase. Yield to maturity. Yield to maturity is the discount rate used in the bond valuation formula. For callable bonds, yield to call is sometimes the more appropriate calculation for the investor if interest rates are expected to decrease.
In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond. This bond is a premium bond as interest rates have declined since the bond was issued.