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Corporate Finance > CHAPTER 6 > Flashcards

CHAPTER 6 Flashcards

1
Q

Bonds are a securities sold by governments and corporations to raise money
from investors today in exchange for promised future payments.

A

YES

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2
Q

The time remaining until the repayment date is known as the term of the bond.

A

YES

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3
Q

By convention the coupon rate is expressed as an effective annual rate.

A

NO

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4
Q

Bonds typically make two types of payments to their holders.

A

YES

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5
Q

The bond certificate indicates the amounts and dates of all payments to be made.

A

YES

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6
Q

The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.

A

NO

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7
Q

The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.

A

YES

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8
Q

Usually the face value of a bond is repaid at maturity.

A

YES

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9
Q

Treasury bills are zero-coupon bonds.

A

YES

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10
Q

Bond traders typically quote bond prices rather than bond yields.

A

NO

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11
Q

The yield to maturity is typically stated as an annual rate by multiplying the
calculated YTM by the number of coupon payment per year, thereby converting
it to an APR.

A

YES

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12
Q

Zero-coupon bonds always trade at a discount.

A

YES

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13
Q

Because we can convert any bond price into a yield, and vice versa, bond prices
and yields are often used interchangeably.

A

YES

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14
Q

The IRR of an investment in a bond is given a special name, the yield to maturity
(YTM).

A

YES

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15
Q

Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no
simple formula to solve for the yield to maturity directly.

A

NO

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16
Q

One advantage of quoting the yield to maturity rather than the price is that the
yield is independent of the face value of the bond.

A

YES

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17
Q

The IRR of an investment opportunity is the discount rate at which the NPV of
the investment opportunity is equal to zero.

A

YES

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18
Q

The yield to maturity for a zero-coupon bond is the return you will earn as an
investor from holding the bond to maturity and receiving the promised face
value payment.

A

YES

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19
Q

When prices are quoted in the bond market, they are conventionally quoted in
increments of $1000.

A

NO

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20
Q

Zero-coupon bonds are also called pure discount bonds.

A

YES

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21
Q

Coupon bonds always trade for a discount.

A

NO

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22
Q

If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond.

A

YES

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23
Q

At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price.

A

YES

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24
Q

Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.

A

YES

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25
Q

If a coupon bond’s yield to maturity exceeds its coupon rate, the present value of
its cash flows at the yield to maturity will be greater than its face value.

A

NO

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26
Q

The price of the bond will drop by the amount of the coupon immediately after
the coupon is paid.

A

YES

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27
Q

A bond trades at par when its coupon rate is equal to its yield to maturity.

A

YES

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28
Q

The clean price of a bond is adjusted for accrued interest.

A

YES

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29
Q

If a bond trades at a premium, its yield to maturity will exceed its coupon rate.

A

NO

30
Q

When a coupon-paying bond is trading at a premium, an investor’s return from the coupons is diminished by receiving a face value less than the price paid for the bond.

A

YES

31
Q

Holding fixed the bond’s yield to maturity, for a bond not trading at par, the present value of the bond’s remaining cash flows changes as the time to maturity decreases.

A

YES

32
Q

A bond that trades at a premium is said to trade above par.

A

YES

33
Q

Prices of bonds with lower durations are more sensitive to interest rate changes.

A

NO

34
Q

Coupon bonds may trade at a discount, at a premium, or at par.

A

YES

35
Q

The sensitivity of a bond’s price changes in interest rates is the bond’s duration.

A

YES

36
Q

When a bond is trading at a discount, the price increase between coupons will
exceed the drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time passes.

A

YES

37
Q

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the current yield.

A

NO

38
Q

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the zero coupon yield.

A

NO

39
Q

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the yield to maturity.

A

YES

40
Q

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the discount yield.

A

NO

41
Q

By convention, practitioners always plot the yield of the most senior issued
bonds, termed the on-the-run-bonds.

A

NO

42
Q

We can determine the no-arbitrage price of a coupon bond by discounting its
cash flows using the zero-coupon yields.

A

YES

43
Q

The yield to maturity of a coupon bond is a weighted average of the yields on
the zero-coupon bonds.

A

YES

44
Q

If the zero coupon yield curve is upward sloping, the resulting yield to maturity
decreases with the coupon rate of the bond.

A

YES

45
Q

When the yield curve is flat, all zero-coupon and coupon-paying bonds will
have the same yield, independent of their maturities and coupon rates.

A

YES

46
Q

Given the spot interest rates, we can determine the price and yield of any other
default-free bond.

A

YES

47
Q

As the coupon increases, earlier cash flows become relatively less important than
later cash flows in the calculation of the present value.

A

NO

48
Q

When U.S. bond traders refer to “the yield curve,” they are often referring to the
coupon-paying Treasury yield curve.

A

YES

49
Q

A corporate bond which receives a BBB rating from Standard and Poor’s is considered an investment grade bond.

A

YES

50
Q

Because the cash flows promised by the bond are the most that bondholders can
hope to receive, the cash flows that a purchaser of a bond with credit risk expects
to receive may be less than that amount.

A

YES

51
Q

A higher yield to maturity does not necessarily imply that a bond’s expected
return is higher.

A

YES

52
Q

By consulting bond ratings, investors can assess the credit-worthiness of a
particular bond issue.

A

YES

53
Q

Because the yield to maturity for a bond is calculated using the promised cash
flows, the yield of bond’s with credit risk will be lower than that of otherwise identical default-free bonds.

A

NO

54
Q

A bond’s rating depends on the risk of bankruptcy as well as the bondholder’s
ability to lay claim to the firm’s assets in the event of a bankruptcy.

A

YES

55
Q

Bonds in the top four categories are often referred to as investment grade bonds.

A

YES

56
Q

Bond ratings encourage widespread investor participation and relatively liquid markets.

A

YES

57
Q

Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy.

A

NO

58
Q

Sovereign debt is always riskless.

A

NO

59
Q

Sovereign debt is debt denominated in soverreigns.

A

NO

60
Q

Sovereign debt is debt issued by national governments.

A

YES

61
Q

A key difference between sovereign default and corporate bonds is that unlike corporate debt, sovereign debt prices are not inverse to yields.

A

NO

62
Q

A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.

A

YES

63
Q

A key difference between sovereign default and corporate bonds is that unlike a corporation, any country can turn to the EMU to pay off its debts.

A

NO

64
Q

A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations
is can not default.

A

NO

65
Q

Forward interest rates tend to be biased downward as predictors of future spot rates when the yield
curve is upward sloping.

A

NO

66
Q

Forward interest rates tend to be biased upward as predictors of future spot rates when the yield curve
is downward sloping.

A

NO

67
Q

Forward interest rates tend not to be good predictors of future spot rates.

A

YES

68
Q

Forward interest rates accurately predict future spots rates because of the law of one price.

A

NO

69
Q

If investors did not care about risk, then they would be indifferent between
investing in a two-year bond and investing in a one-year bond and rolling over
the money in one-year.

A

YES

70
Q

In general, the expected future spot interest rate will reflect investor’s preferences
toward the risk of future interest rate fluctuations.

A

YES

71
Q

When we refer to the one-year forward rate for year 5, we mean the rate
available today on a one-year investment that begins four years from today and
is repaid five years from today.

A

YES

72
Q

In general, we can compute the forward rate for year n by comparing an
investment in an n-year, zero-coupon bond to an investment in an (n + 1) year, zero-coupon bond, with the interest rate earned in the nth year being guaranteed through an interest rate forward contract.

A

NO

Corporate Finance (12 decks)

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