BUS-F 370 Module 3: TVM Car Loans and Intro to Bonds

If a company needs to make a long-term investment, it may issue a ____________, which is a debt security held by individual investors.

bond

Treasury bonds with maturities of 2 to 10 years at the time of issue are called _____________.

notes

Can you buy most bonds on the stock exchange?

No

The interest payment on a bond is called the bond's _____________.

coupon

The coupon payment as a percent of face value is called the bond's _____________.

coupon rate.

Bond prices are usually expressed as a _______________ of their face value.

percentage

Present value of a bond =

PV (coupon x annuity factor) + PV (face value + discount factor)

Do bond prices change with interest rates?

Yes

The ____________ the interest rate the higher the price of a bond.

lower

Interest rates and bond prices must move in _____________ directions.

opposite

When interest rates rise, the present value of the payments to be received by the bondholder falls and bond prices ____________.

fall

The ____________ of a bond is the rate of return that investors require.

interest rate

A bond that is priced below face value sells at a ____________ and is known as a discount bond.

discount

Investors in discount bonds receive a capital ________________ over the life of the bond, so that the return on a discount bond is greater than the coupon rate.

gain

A bond that is priced at face value, or at par, is known as a ______________.

par bond.

_______________ is defined as the discount rate that makes the present value of the bond's payments equal to its price.

Yield to maturity

Rate of return=

(coupon income + price change)/investment

What is the Excel function for bond value?

=PRICE

The relationship between bond yields and time to maturity is known as the ______________.

yield curve.

The prices of long-term bonds fluctuate ___________ than those of short-term bonds.

more

The risk that a bond issuer may default on its obligations is called _______________.

default risk

How do companies compensate for default risk?

By promising a higher rate of interest on their bonds

The difference between the promised yield on a corporate bond and the yield on a U.S. Treasury bond with the same coupon and maturity is called the _______________

default premium.

The _____________ the chance that a company will get into trouble, the higher the default premium demanded by investors.

greater

Investors prefer ____________ bonds that they can easily buy and sell.

liquid

When companies borrow, they may also set aside some assets as security for the loan, which are called ______________.

collateral

The change in value of securities due to changes in interest rates is known as _______________.

interest rate risk

The ____________ on government bonds provide a benchmark for all interest rates.

interest rates

The payment made when a bond matures is called the bond's _____________.

face value.

What is the excel function to find the principle component of a periodic payment?

=PPTM

What is the excel function to find the interest component of a periodic payment?

=IPMT

Annual percentage rate (APR)=

Monthly rate x 12

Effective Annual Interest Rate (EAR)=

(1+ monthly rate)*12-1

Are price and value the same?

No

The ___________ is the amount of principle balance remaining for the rest of the life of the loan. If you are paying the loan off at that point on the timeline, there is no further interest accrued !

payoff amount

__________ are debt that is made with an investor for cash in exchange for payouts of interest.

Bonds

Bonds are typically traded _______________.

over the counter

___________ are lower risk and lower reward compared to stocks.

Bonds

Bonds are issues of ___________.

debt

____________ are issues of ownership in a company.

stocks

__________ are a claim to a company's assets and earnings that often gives the invstor voting rights and pays dividends.

stocks

____________ are generally higher risk and higher reward.

stocks

The __________ of a bond is the payment at the maturity of the bond.

face value (par value or principle value)

_________ is the interest payments made to the bondholder (often occuring semi-annually)

coupon

The ____________ is an annual interest payment, as a percentage of the bond's par or face value

coupon rate

The coupon rate IS _____________ the discount rate (interest rate) used in the Present Value calculations

NOT

The coupon rate merely tells us what ________________ the bond will produce over the life of the bond

cash flow

The ______________ of a bond is the present value of all cash flows generated by the bond (i.e., coupons and face value) discounted at the required rate of return

price

If a bond pays semi-annual coupons versus annual coupon payments, you ___________ the total number of cash flows to be discounted in the PV formula.

double

If a bond pays semi-annual coupons versus annual coupon payments, the discount rate is also changed from the annual rate to the ___________ year rate.

half

If interest rates rise, bond prices ___________.

fall

If interest rates fall, bond prices _____________.

increase

Solving a ________ is a 2 step process: (1) convert annuity to lump sum, (2) move lump sum to time period 0.

delayed annuity

Can you mix nominal and real cash flows?

NO