Exam 2

Question 1

What is a Bond

Answer 1

Debt contract - interest only loan - that you will pay later on in the future

Question 2

What is par value?

Answer 2

It is the face amount of the bond paid at maturity

Question 3

What is the coupon rate?

Answer 3

It is the stated interest - usually YTM at issue

Question 4

How do you calculate coupon payment?

Answer 4

Coupon rate x par value

Question 5

How do you calculate coupon yield?

Answer 5

Current yield x par value

Question 6

What is the maturity date of a bond

Answer 6

It is the years until the bond must be repaid

Question 7

What is yield to maturity

Answer 7

Market required rate for bonds of similar risk and maturity - basically the coupon rate at issue - noted as APR

Question 8

How do you price bonds on the calculator

Answer 8

2nd > 9 > bond
SDT = actual settlement date (day you receive bond when buy)
CPN = ANNUAL RATE IN PERCENTAGE (1=100%) - COUPON RATE
RDT = BOND MATURITY DATE
RV = REDEMPTION VALUE A % OF PAR - HOW MUCH YOU GET AT maturity
ACT = ACTUAL NUMBER OF DAYS (360)
2/Y = 2/Y OR 1/Y - HOW MANY COUPON PER YEAR (PERIODS)
YLD = YIELD TO REDEMTION -
CPT = COMPUTE
PRI = DOLLAR PRICE PER 100 PAR VALUE
AI = ACCRUED INTEREST (ADD TO PRI FOR DIRTY PRICE)

Question 9

Discount bond

Answer 9

Bond price below par value

Coupon rate below YTM

Question 10

Premium bond

Answer 10

Price of bond above par value

Coupon higher than yield to maturity

Question 11

How to find Pv of bond

Answer 11

1000 > fv
1000 x .1 > pmt
Maturity 5 years > n = 5
Ytm = 11% > i/y = 11
Cpt > pv (compute pv)
-963.04

Question 12

What is price risk

Answer 12

Change in price due to changes in interest rates

Question 13

Long term bonds have more price risk than what

Answer 13

Short term bonds

Question 14

Low coupon rate bonds have more proce risk than what

Answer 14

High coupon rate bonds

Question 15

What is reinvestment rate risk

Answer 15

Uncertainty concerning rate at which cash flows can be reinvested

Question 16

Short term bonds have more reinvestment risk than

Answer 16

Long term

Question 17

High coupon rate have more reinvestment risk than

Answer 17

Low rate bonds

Question 18

How do you compute yield to maturity

Answer 18

You enter pmt and fv (they must be same sign)

Pv opposite sign

Cpt i/y for yield (YTM)

Question 19

Debt v equity: debt

Answer 19

Not ownership interest
No vote
Interest tax deductible
Creditors can get you
Can lead to financial distress

Question 20

Debt v equity: equity

Answer 20

Ownership interest
Common stock holders vote to elect bod
Dividends not tax deductible
Dividend liability of firm
All equity firm cannot go bankrupt

Question 21

Bond indenture

Answer 21

Deed of trust - contract bw issuing company and bondholders include
Special calls

Question 22

Collateral bonds

Answer 22

Secured by financial security

Question 23

Mortgage

Answer 23

Secured by real property land

Question 24

Debentures

Answer 24

Unsecured bond

Question 25

Notes

Answer 25

Unsecured debt with original maturity less than 10

Question 26

Which bonds have high coupon rates with everything else equal?

Answer 26

A bond with a longer maturity will usually have higher rate than short term

Question 27

Bond rating

Answer 27

High-grade Medium Low Very low

Question 28

High grade bonds

Answer 28

Pay is extremely strong to strong

Question 29

Medium grade bonds

Answer 29

Strong but more susceptible to change - addiquat

Question 30

Government bonds include

Answer 30

Municipal securities Treasury securities

Question 31

What are municipal securities

Answer 31

Debt of the state and local government

Question 32

Treasury securities are what

Answer 32

Federal government debt

Question 33

Types of treasury securities

Answer 33

Treasury bills Treasury notes Treasury bonds

Question 34

Treasury bill

Answer 34

Pure discount bond Original maturity one year or less

Question 35

Treasury note

Answer 35

Coupon debt Maturity one to ten year

Question 36

Treasury bond

Answer 36

Coupon debt Maturity greater than ten year

Question 37

Zero coupon bond

Answer 37

Coupon rate zero no periodic Difference between purchase price and par value (cap gains) interest payment Zero/deep discount Treasury bill ans us saving bond

Question 38

Floating rate bond

Answer 38

Coupon rate floats depending in some index value Less price risk

Question 39

Bond markets are

Answer 39

Primary over the counter transaction with dealers

Question 40

Quote bind price equals what

Answer 40

Clean price Net accused interest

Question 41

Invoice price equals what

Answer 41

Dirty price or full price Price actually paid With accrude interest

Question 42

Accrued interest is what

Answer 42

Interest earned since last coupon payment is owerd to bond seller at time of sale

Question 43

Fisher effect is what

Answer 43

Relationship bw time to maturity and yield all else equal 1+R = (1+r)(1+h) R= quotes rate r=real rate h=inflation rate Approximation R=r+h

Question 44

If you own a stock you are a what

Answer 44

Owner of the corp

Question 45

You can receive cash from stocks by

Answer 45

Dividens and selling shares

Question 46

Price of stock is the present value of

Answer 46

Dividends cash income Selling = capital gains

Question 47

Find npv of stock

Answer 47

Do CF on calculator

Question 48

Perpetuity means what

Answer 48

Equal number of cash flow given a rate of return

Question 49

Constant dividend growth/zero growth

Answer 49

Firm pays constant dividend Preferred stock Price computed using the perpetuity formula

Question 50

Perpetuity formula

Answer 50

P0=dividend/rate

Question 51

Constant dividend growth

Answer 51

Firm will increase dividend by cosntant percent every period