Investing basics and bonds Flashcards
(31 cards)
If market interest rates decrease from 7% to 6%, what happens to the value of a $1,000 bond with a fixed interest rate?
If overall interest rates decrease, a $1,000 bond with a fixed interest rate will increase in value.
Haley currently owns a $1,000 bond with a fixed interest rate of 3%. The market interest rate is currently 5%. What is the approximate market value of her bond?
First, calculate annual interest by multiplying the face value of the bond by the bond’s interest rate [(1,000 × 0.30) = $30]. Next, divide the annual interest amount by the market interest rate [(30 ÷ 0.05) = $600]. The market value of Haley’s bond is $600.
If a bond has increased or decreased in value, one option for the bondholder is to keep the bond until maturity. What is the other option discussed in the video?
The video states the options for bondholders are to sell the bond at its current price or to keep the bond until maturity.
Although Level Two Investments are more speculative than Level One Investments, the primary goal is to choose investments that provide _________ and __________.
Although Level Two Investments are more speculative than Level One Investments, the primary goal is to choose investments that provide safety and income.
Which types of companies (as discussed in the video) are considered growth investments?
Many technology companies, like Facebook and Google, are considered growth investments because of the potential increase in value over time.
Level Four Investments include all of the following
Level Four Investments include speculative stocks, options, commodities, and other high-risk investments.
Monitoring the __________ will tell an individual whether the investment is increasing or decreasing in value.
Monitoring the current values will tell an individual whether the investment is increasing or decreasing in value.
According to the video, what should be on the left side of an investment value graph?
Dollar amounts should be placed along the left side of the investment value graph.
According to the video, what should be placed near the middle of an investment value graph?
The price paid for the investment should be placed near the middle of the investment value graph.
All of the following are true of mortgage bonds
Mortgage bonds are secured by specific assets. Interest rates on mortgage bonds are usually lower than interest rates on unsecured debentures. Mortgage bonds are more secure than other types of corporate bonds. If the corporation fails to make interest payments under mortgage bonds, assets and collateral can be sold to repay the bondholders
All of the following are true of convertible corporate bonds
Investors of convertible corporate bonds have a lower risk. Interest rates for convertible bonds are usually 1 to 2 percent lower than other bonds issued by the same corporation. Convertible bonds can be exchanged at the owner’s option for a specified number of shares of the corporation’s common stock. Investors are able to take advantage of the speculative nature of common stock with convertible bonds.
All of the following are true of high-yield bonds
High-yield bonds pay higher interest rates. High-yield bonds have a higher risk of default. High-yield bonds have a “real” risk that corporations will not be able to pay interest each year until maturity. Companies with poor earnings history or questionable credit record commonly sell high-yield bonds.
Jaylyn owns a $1,000 Exxon corporate bond that pays 5.7% annually. After signing the paperwork, Jaylyn realized that the bond pays interest semiannually. What is the amount of Jaylyn’s semi-annual interest payments?
Semi-Annual Interest Payment = [(Face Value × Interest Rate) ÷ 2]
= [($1,000 × 0.0570) ÷ 2]
= $28.50
Allie purchased a $1,000 Courtstreet bond that pays 6.3% annually. Six years later, new corporate bond issues with comparable quality are paying 4.6%. What is the approximate market value for Allie’s bond?
Annual Interest = Face Value × Interest Rate = $1,000 × 0.630 = $63.00
Approximate Market Value = Annual Interest ÷ Comparable Interest Rate
= $63 ÷ 0.0460
= $1,369.57
When the interest rate for comparable bonds is __________ than the interest rate for your bond, the approximate market value for your bond will __________.
There is an inverse relationship between the interest rate and market value for bonds. When the interest rate for comparable bonds is less (more) than the interest rate for your bond, the approximate market value for your bond will increase (decrease).
Which of the following is defined as a bond that is backed by the full faith, credit, and unlimited taxing power of the government that issued it?
A general obligation bond is a bond that is backed by the full faith, credit, and unlimited taxing power of the government that issued it.
Jennifer is trying to decide if she should invest in a municipal bond issued by the state of North Carolina that pays 6% or a corporate bond issued by Hess Corporation that pays 8%. Jennifer’s current tax rate is 33%. What is the tax-equivalent yield for the North Carolina bond?
Tax-Equivalent Yield = [Tax-Exempt Yield ÷ (1 − Tax Rate)]
= [0.06 ÷ (1 − 0.33)]
= 0.0896 → 8.96%
All of the following are true of municipal bonds
Municipal bonds can either be general obligation bonds or revenue bonds. Municipal bonds can be one more way to diversify your investment holdings. Municipal bonds are usually purchased directly from the government that issued them or through account executives or brokerage firms. The interest on municipal bonds may be exempt from federal taxes.
All of the following are considered characteristics of Treasury Bills or T-Bills.
Treasury Bills are “discounted” securities that are sold in minimum units of $100 with additional increments of $100. Currently the government sells T-Bills with 4-week, 13-week, 26-week, and 52-week maturities. However, T-Bills are not sold in maximum units of $500.
All of the following are considered characteristics of Treasury Notes.
Treasury Notes are sold in minimum units of $100 with additional increments of $100 above the minimum. Maturities for Treasury Notes can range from one year to ten years. The interest rates for notes are slightly high than the interest rates for T-Bills because of the longer maturity and interest for Treasury Notes is paid every six months until maturity.
The principal or face value of Treasury Inflation-Protected Securities (TIPS) __________ with inflation and interest payments __________ with inflation.
The principal or face value of Treasury Inflation-Protected Securities (TIPS) increase with inflation and interest payments also increase with inflation.
Robert and Robin Nelson have total take-home pay of $9,000 a month. Their monthly expenses total $7,200. Calculate the minimum amount this couple needs to establish an emergency fund.
Minimum emergency fund = Monthly expenses × 3 months
= $7,200 × 3 months
= $21,600
Assume you are in the 33 percent tax bracket and purchase a municipal bond with a yield of 5.00 percent. Use the formula presented in this chapter to calculate the taxable equivalent yield for this investment.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
Taxable equivalent yield = Tax-exempt yield ÷ (1 − Your tax rate)
= 0.05 ÷ (1 − 0.33)
= 0.0746, or 7.46%
Assume you are in the 35 percent tax bracket and purchase a municipal bond with a yield of 7.25 percent. Use the formula presented in this chapter to calculate the taxable equivalent yield for this investment.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
Taxable equivalent yield = Tax-exempt yield ÷ (1 − Your tax rate)
= 0.0725 ÷ (1 − 0.35)
= 0.1115, or 11.15%
