FINE 2000 Chapter Notes - Chapter 8: Interest Rate, High-Yield Debt, Corporate Bond

31 views2 pages

sapphiresea-lion342

14 Jun 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

The interest payment paid to the bondholders is called the coupon coupon rate is the annual interest payment divided by the face value of the bond. The interest rate (or discount rate) is the rate at which the cash flows from the bond are discounted to determine its present value. The coupon rate and the discount rate are not necessarily the same! When they are not, the price of the bond is not the same as its face value. The price of a bond is the present value of all its future cash flows, that is, it is the present value of the coupon payments and the face value of the bond. Given same coupon rate, higher the interest rate -> lower current price of bond: bond value discounted by interest rate, coupon rate = rate at which interest in earned. Coupon rate is used to calculate value of payments (interest payments)

Related Questions

2. Four coupon bonds are sold in the market with the following information:

Bond 1 Face value $1000 Coupon rate 5% Maturity 10 years

Bond 2 Face value $1000 Coupon rate 9% Maturity 10 years

Bond 3 Face value $1000 Coupon rate 7% Maturity 10 years

Bond 4 Face value $1000 Coupon rate 9% Maturity 30 years
(1) Without calculation, order the present values of the bonds from high to low under the constant interest rate of 7%. Hint: Your explanation is crucial because we require no calculation.
(2) Calculate the present value of the bonds under the constant interest rate of 7%.
(3) Now that all four bonds are sold at a same price. Is it true that people will surely buy the one with the highest present value calculated in (2)? If your answer is no, explain your reason.

pucewallaby960

QUESTION 1 The largest investors in corporate bonds are life insurance companies and pension funds. True False 5 points QUESTION 2 Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. True False 5 points QUESTION 3 The value (or price) of a bond is the present value of its expected future cash flows. True False 5 points QUESTION 4 Bond prices decline when the interest rate decreases. True False 5 points QUESTION 5 The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000. True False 5 points QUESTION 6 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. True False 5 points QUESTION 7 Zero coupon bonds have no coupon payments so they sell for more than their par value. True False 5 points QUESTION 8 Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes. True False 5 points QUESTION 9 US Treasury securities are considered risky investments because the coupon payments are unpredictable. True False 5 points QUESTION 10 Bonds are very difficult to value because their future cash flows are very difficult to predict. True False 5 points QUESTION 11 If the bond's coupon rate is equal to the market rate then the bond will sell at a price equal to its face value greater than its face value less than its face value equal to its foreign currency value, e.g., its price in British pounds 5 points QUESTION 12 When calculating the price of a bond that pays a semiannual coupon one needs to use double the number of years until maturity for the number of payments use half the annual coupon payment use half the annual rate of return as the discount rate all of the above 5 points QUESTION 13 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments more than the price of the bond equal to zero equal to the price of the bond less than the price of the bond 5 points QUESTION 14 Which one of the following statements is true? All else equal long-term bonds have lower price volatility than short-term bonds. There is an inverse relation between bond prices and market interest rates. All else equal short-term bonds are more risky than long-term bonds. All else equal US government bonds are more risky than corporate bonds. 5 points QUESTION 15 An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for its par value. a discount. a premium. its face value. 5 points QUESTION 16 BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? 5 points QUESTION 17 Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually? 5 points QUESTION 18 Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond? 5 points QUESTION 19 Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity? 5 points QUESTION 20 You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

The yield to maturity on a bond is __________________ .

	a.	below the coupon rate when the bond sells at a discount, and above the coupon rate when the bond sells at a premium.
	b.	the discount rate that will set the present value of the future cash payments of interest and principal equal to the bond price.
	c.	based on the assumption that any payments received are reinvested at the coupon rate.
	d.	none of the above.

indigooyster495

FINE 2000 Chapter Notes - Chapter 8: Interest Rate, High-Yield Debt, Corporate Bond

Document Summary

Get access

Related Documents

FINE 2000 Study Guide - Quiz Guide: Weighted Arithmetic Mean, Credit Risk, Yield Curve

FINE 2000 Lecture Notes - Lecture 4: Current Yield, Discounting

FINE 2000 Chapter Notes - Chapter 5-6: Accrued Interest, Cash Flow, Discount Window

Related Questions