Ch 6

Question 0

Face value AKA par value

Answer 0

Principal amount of bond that is repaid at end

Of term

Question 1

Coupon

Answer 1

Stated interest payment made on bond

Question 2

Coupon rate

Answer 2

Annual coupon divided by face value of bond

Question 3

Maturity

Answer 3

Date on which principal amount of bond is paid

Question 4

Yield to maturity (YTM)

Answer 4

Rate required in the market on bond

Question 5

What happens to the present value of a bond when interest rates rise? When they fall?

Answer 5

The present value of the bonds cash flows decline

And the bond is worth less

Vice versa when interest rates fall

Question 6

a bond that has a yield to maturity of 8% and has 10 years to maturity. What’s the present value of $1,000 paid in 10 years?
Present value of the annuity stream?
Total bond value?

Answer 6

Present value = $1,000/(1.08^10) = $1,000/2.1589 = $463.19

Annuity present value = $80 x (1 - 1/1.08^10)/.08 = 536.81

Total bond value = $463.19 + $536.81= $1,000
Note bond sells for exactly it’s face value

Question 7

Discount bond

Answer 7

Bond selling for less than face value

Question 8

Bond Value Equation, (numbers and verbal)

Answer 8

Bond value = C x [1- 1/(1 + r)^t]/r + F/(1 + r)^t
Bond value = present value. +. Present value of the
Of the coupons. Face amount

Ex. Bond value = $80 x (1 - 1/1.1^6)/.1 + $1000/1.1^6

Question 9

2 main factors that determine interest rate risk?

Answer 9

1 the longer time to maturity
means more interest rate risk

2 the lower the coupon rate
means More interest rate risk

Question 10

Current yield, ex

Answer 10

Bonds annual coupon divided by its price

Ex 80/955.14 = 8.38 percent

Question 11

Finding the yield on a bond?

Answer 11

Given bond value, coupon, time to maturity and face value
Only possible to find through trial and error from equation
Below:

Bond value = C x [1- 1/(1 + r)^t]/r + F/(1 + r)^t

Question 12

Indenture

Answer 12

Written agreement btw the corporation and lender

Detailing the terms of the debt issue

Question 13

6 provisions of an indenture?

Answer 13

1 basic terms of the bond
2 total amount of bonds issued
3 description of property used as security
4 repayment arrangements 
5 the call provisions
6 details of protective covenants

Question 14

Registered form

Answer 14

Form of bond issue which the register of the company
Records ownership of each bond

Payment is made directly to owner of record

Question 15

Bearer form

Answer 15

Form of bond issue where the bond is issued without
Record of owner’s name;

Payment is made to whomever holds the bond

Question 16

Debenture

Answer 16

Unsecured debt, usually with maturity of 10 years or more

Question 17

Note

Answer 17

Unsecured debt, usually with maturity of under 10 years

Question 18

Seniority

Answer 18

Indicates preference in position over other lenders,

Debts are labeled as senior or junior

Question 19

Sinking fund

Answer 19

Account managed by the bond trustee for early

Bond redemption

Question 20

Call provision

Answer 20

Agreement giving the corporation the option to

repurchase the bond at specific price prior to maturity

Question 21

Call premium

Answer 21

Amount by which the call price exceeds the par value of

The bond

Question 22

Deferred call provision

Answer 22

Call provision prohibiting the company from redeeming

The bond prior to a certain date

Question 23

Call protected bond

Answer 23

Bond that currently can’t be redeemed by issuer

Question 24

Protective covenant, negative, positive?

Answer 24

Part of the indenture limiting certain actions that might Be taken during the term of the loan, usually to protect the lender ``` Negative = limitations Positive = requirements ```

Question 25

Zero coupon bond

Answer 25

Bond that makes no coupon payments and is | Initially priced at a deep discount

Question 26

floating rate bond?

Answer 26

Bonds where coupon rates are adjustable Tied to 30-yr treasury bill index

Question 27

Structured notes

Answer 27

Bonds that are based on stocks, bonds, commodities | Or currencies

Question 28

Convertible bond

Answer 28

Can be swapped for fixed number of stock shares

Question 29

Put bond

Answer 29

Allows holder to force issuer to buy bond back at | stated price

Question 30

Bid price

Answer 30

Price dealer is willing to pay for a security

Question 31

Asked price

Answer 31

Price dealer is willing to take for a security

Question 32

Bid-ask spread

Answer 32

Difference between the bid price and the asked price

Question 33

Clean price

Answer 33

Price of bond net of accrued interest Price typically quoted

Question 34

Dirty price AKA Invoice price

Answer 34

Price of bond including accrued interest Price buyer actually pays

Question 35

Real rates

Answer 35

Interest rates or rates of return that have been adjusted | for inflation

Question 36

Nominal rates

Answer 36

Interest rates or rates of return that have not been adjusted for inflation

Question 37

Fisher effect, define, equation?

Answer 37

Relationship between nominal returns, real returns And inflation 1 + R = (1 + r) x (1 + h) Where R = nominal rate of return r = real rate of return h = inflation rate

Question 38

If investors require a 10 percent real rate of return and the inflation rate is 8 percent, what must the approximate nominal rate be? The exact nominal rate?

Answer 38

Approx: 10% + 8% = 18% Exact: 1 + R = (1 + r) x (1 + h) 1.1. x. 1.08. = 1.188 or 18.8%

Question 39

Term structure of interest rates AKA pure time value of money

Answer 39

Relationship between nominal interest rates on default- | Free, pure discount securities and time to maturity

Question 40

Inflation premium

Answer 40

Portion of nominal interest Rae that represents | Compensation for expected future inflation rate

Question 41

Interest rate risk premium

Answer 41

Compensation investors demand for bearing interest rate risk

Question 42

Treasury yield curve

Answer 42

Plot of the yields on treasury notes and bonds | Relative to maturity

Question 43

Default risk premium

Answer 43

Portion of a nominal rate or bond yield that represents | Compensation for the possibility of default

Question 44

Tax ability premium

Answer 44

Portion of a nominal interest rate or bond yield that | Represents compensation for unfavorable tax status

Question 45

Liquidity premium

Answer 45

Portion of a nominal interest rate or bond yield that | Represents compensation for lack of liquidity

Question 46

6 main effects on a bond yield?

Answer 46

``` 1 real rate of interest Premiums: 2 expected future inflation 3 interest rate risk 4 default risk 5 tax ability 6 lack of liquidity ```