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Finance Final
| Question | Answer |
|---|---|
| A loan to a company or government that pays back a fixed rate of return. Generally stockholders invest in bonds. It's a safer investment than stocks, but still has risks. | Bond |
| The face value of a bond or the stock value stated in the corporate charter; the principal amount of a bond that is repaid at the end of the term | Par Value / Face Value / Nominal Value |
| The annual coupon payments (yield) paid by the issuer relative to the bond's face or par value; the annual coupon divided by the face value of a bond | Coupon Rate |
| The annual interest rate paid on a bond (to the investor), expressed as a percentage of the face value and paid from issue date until maturity; the specified number of dollars of interest paid each year. | Coupon Payment |
| The specified date on which the principal amount of a bond is paid | Maturity Date |
| ____ refers to the earnings generated and realized on an investment over a particular period of time; the rate required in the market on a bond | Yield (yield to maturity) |
| A bond's annual coupon divided by its price | Current Yield |
| As interest rates increase, present values... | decrease |
| As interest rates increase, bond prices... | decrease and vice versa |
| Bond Value = PV of coupons +...? | PV of par |
| Bond Value = PV of annuity +...? | PV of lump sum |
| Three points of yield to maturity? | (1) Internal rate of return of investing in a Bond when holds the bond until maturity and if payments are made as scheduled.(2) is expressed as an annual rate. (3) Yield to Maturity (YTM) is the rate implied by the current bond price. |
| True or false: As time passes, interest rates change in the market place, the cash flows from a bond however, stay the same. | true |
| True or false: The value of the bond will fluctuate. | true |
| As interest rates rise, the PV of bond...? | declines |
| As interest rates fall, the PV of bond...? | increases |
| True or false: If YTM = coupon rate, then par value = bond price | true |
| Three points for price risk? | 1. Change in price due to changes in interest rates 2. Long-term bonds have more price risk than short-term bonds 3. Low coupon rate bonds have more price risk than high coupon rate bonds |
| Three points for Reinvestment Rate Risk? | 1. Uncertainty concerning rates at which cash flows can be reinvested 2. Short-term bonds have more reinvestment rate risk than long-term bonds 3. High coupon rate bonds have more reinvestment rate risk than low coupon rate bonds |
| Yield to maturity is the rate implied by...? | the current bond price |
| True or False: Bonds of similar risk (and maturity) will be priced to yield about the same return, regardless of the coupon rate | True |
| 4 points for debt: (#5 can lead to bankruptcy) | 1. Not an ownership interest 2. Creditors do not have voting rights 3. Interest is considered a cost of doing business & is tax deductible 4. Creditors have legal recourse if interest/principal payments are missed |
| True or False: An all equity firm can not go bankrupt merely due to debt since it has no debt | True |
| Bond Indenture / Deed of Trust is the...? | Contract between the company & the bondholders that includes the basic terms, total amount of bonds issued, description of property used as security, sinking fund provisions, call provisions, details of protective covenants |
| True or False: A trustee (a bank) is appointed by the corporation to represent the bondholders | True |
| Types of securities (what they would pay if they went bankrupt): | Collateral (assets pledged), mortgage (land or property), Debentures (unsecured, no specific pledge of property), Notes ( unsecured debt with original maturity lessthan 10 years) |
| Seniority..? | debt cannot be subordinated to equity |
| Types of Treasury securities: | 1. T-bills – pure discount bonds with original maturity of one year or less 2. T-notes – coupon debt with original maturity between one and ten years 3. T-bonds – coupon debt with original maturity greater than ten years |
| Characteristics of municipal securities: | 1. General obligation and Revenue bonds 2. Debt of state and local governments 3. Varying degrees of default risk, rated similar to corporate debt 4. Interest received is tax-exempt at the federal level |
| ZERO COUPON BONDS make no... | periodic interest payments (coupon rate = 0%) |
| True or False: The entire yield-to-maturity comes from the difference between the purchase price and the par value | True |
| True or False: Zero Coupon Bonds can sell for more than par value | False, they cannot sell for more than par value |
| Treasury Bills and principal-only Treasury strips are good examples of...? | Zero Coupon Bonds |
| Floating-Rate bonds are...? | bonds where the coupon rate floats depending on some index value |
| Examples of floating- rate bonds are...? | adjustable rate mortgages and inflation-linked Treasuries |
| True or False: There is MORE price risk with floating rate bonds | False, there is LESS price risk with floating rate bonds |
| Real rate of interest is the...? | change in purchasing power |
| Nominal rate of interest...? | quoted rate of interest, change in actual number of dollars |
| True or False: The ex ante nominal rate of interest includes our desired real rate of return plus an adjustment for expected inflation | True |
| Nominal rate on an investment is...? | the percentage change in the number of dollars you have |
| Real rate on an investment is the...? | percentage change in how much you can buy with your dollars |
| Normal Yield Curve: | upward-sloping; long-term yields are higher than short-term yields |
| Inverted Yield Curve: | downward-sloping; long-term yields are lower than short-term yields 7-46 Copyright © 2016 by McGraw-Hill Global |
Created by:
jwe23