Exam 2 Part B Flashcards
Earning interest on the interest earned in prior years is called
compounding
The present value of a security is
directly related to the principal amount
The present value of a series of future payments is
inversely related to the rate of discount
A coupon bond involves
interest payments from the borrower to the lender periodically during the life of the loan and payment by the borrow to the lender of the par value of the bond at maturity
Simple loans and discount bonds differ from coupon bonds and fixed payment loans in that
interest on simple loans and discount bonds in paid in a single payment, while issuers of coupon bonds and fixed payment loans make multiple payments of interest and principal
The key to present value calculations is that they
provide a common unit for measuring funds at different times
For a coupon bond, the yield to maturity
equates the present value of all the bond’s payments to its price today
If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you can be sure that
the market price of your bond will rise
If the currend price of a bond is greater than its face value
the yield to maturity must be less than the coupon rate
For a specific change in the market interest rate, the
shorter the time until a bond matures, the smaller the change in its price
The market interest rate is _____ than the _____ rate when the bond price is _____ its face value
greater: coupon: below
the issuer of a bond is a
borrower
If a lender is certain that market interest rates will rise in the future, which of the following will be the best instrument to purchase?
treasury bill
If the interest rates on all bonds falls by 75 basis points, which of the following bonds would you prefer to own if you decide to stop lending?
A bond with 20 years to maturity
A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
fixed payment loan
