MGT 181 - Chapter 7

A bond's coupon rate is equal to the annual interest divided by which one of the

following?

face value

The specified date on which the principal amount of a bond is payable is referred

to as which one of the following?

maturity

The current yield is defined as the annual interest on a bond divided by which one

of the following?

market price

An indenture is:

the legal agreement between the bond issuer and the bondholders.

A bond that is payable to whomever has physical possession of the bond is said to

be in:

bearer form

The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par.

These bonds fit the definition of which one of the following terms?

Debenture

Which of the following defines a note?

unsecured & maturity less than 10 years

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

A bond that can be paid off early at the issuer's discretion is referred to as being which

one of the following?

callable

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030,

plus any accrued interest. The additional $30 is called which one of the following?

call premium

A deferred call provision is which one of the following?

prohibition which prevents bond issuers from redeeming callable bonds

prior to a specified date

A call-protected bond is a bond that:

cannot be called during a certain period of time

The items included in an indenture that limit certain actions of the issuer in order to

protect bondholder's interests are referred to as the:

protective covenants

A bond that has only one payment, which occurs at maturity, defines which one of the

following?

zero coupon

Which one of the following is the price a dealer will pay to purchase a bond?

bid price

You want to buy a bond from a dealer. Which one of the following prices will you

pay?

asked price

The difference between the price that a dealer is willing to pay and the price at which

he or she will sell is called the:

spread

A bond is quoted at a price of $989. This price is referred to as which one of the

following?

clean price

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:

dirty price

Real rates are defined as nominal rates that have been adjusted for which of the

following?

inflation

Interest rates that include an inflation premium are referred to as:

nominal rates

The Fisher effect is defined as the relationship between which of the following

variables?

real rates, inflation rates, and nominal rates

The pure time value of money is known as the:

term structure of interest rates.

Which one of the following premiums is compensation for expected future inflation?

inflationn

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk.

A Treasury yield curve plots Treasury interest rates relative to which one of the

following?

Maturity

Which one of the following risk premiums compensates for the possibility of

nonpayment by the bond issuer?

default risk

The taxability risk premium compensates bond holders for which one of the

following?

a bond's unfavorable tax status

The liquidity premium is compensation to investors for:

the lack of an active market wherein a bond can be sold for its actual

value

An 8 percent corporate bond that pays interest semi-annually was issued last year.

Which two of the following most likely apply to this bond today if the current

yield-to-maturity is 7 percent?

a structure as an interest-only loan & a market price that differs from the face value

A bond has a market price that exceeds its face value. Which of the following features

currently apply to this bond?

premium price & Iyield-to-maturity that is less than the coupon rate

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to

maturity

a discount; less than

The Walthers Company has a semi-annual coupon bond outstanding. An increase in

the market rate of interest will have which one of the following effects on this bond?

decrease the market price

Which of the following are characteristics of a premium bond?

coupon rate < yield-to-maturity & coupon rate > current yield

Which of the following relationships apply to a par value bond?

current yield = yield-to-maturity & market price = face value

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all

else constant

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon

and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par.

Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The

bonds are currently priced at par value. The effective annual rate provided by these bonds

must be:

greater than 7 percent