Chapter 10: Bonds Valuation

Question 1

The formula of valuation of bonds

Answer 1

Price = PV (coupons) + PV (principal/par value)

Question 2

The bond’s value now or in period zero

Answer 2

Price

Question 3

The coupon payment

Answer 3

C

Question 4

The bond’s principal payment

Answer 4

Par

Question 5

the rate of return required by investors on this quality or risk class of bonds given its bond rating.

Answer 5

rB

Question 6

Bond’s intrinsic value

Answer 6

Bond’s price

Question 7

Pay coupon interests once a year/annually

a. Eurobonds
b. American bonds

Answer 7

a. Eurobonds

Question 8

Pay coupon interests twice a year/semi-annually

a. Eurobonds
b. American bonds

Answer 8

b. American bonds

Question 9

The r reflects the combination of the real risk-free rate and expected inflation as measured by the nominal risk-free interest rate.

Answer 9

No default risk

Question 10

The r represents a nominal risk-free rate plus a premium to reflect ________ risk.

Answer 10

Default risk.

Question 11

Stated annual rate or the required rate of return (rb) commonly called the market rate

Answer 11

Annual Percentage Rate (APR)

Question 12

Face value of a security

Answer 12

Par Value

Question 13

Par Value = $1,000
Coupon rate = 8%
n = 10 years
m =2

What is annual coupon payment?

Answer 13

> $1,000 x 0.08
= $80 / year

Question 14

Par Value = $1,000
Coupon rate = 8%
n = 10 years
m =2

What is semi- annual coupon payment?

Answer 14

> $80 / 2 = $40

Question 15

Estimated return on a bond if held to maturity.

Answer 15

Yield to maturity

Question 16

Formula of AYM

Answer 16

AYM = Annual Interest + [(par value - price) / yrs to maturity] / (Par value + Price) / 2

Question 17

Par value = $1,000
Price = $875.48
Bond life = 10 years
Annual Coupon = $80

Find the AYM

Answer 17

= 9.86%

Question 18

True or False

The larger the coupon interest, the higher the bond’s price.

Answer 18

True

Question 19

par value = $1,000
n = 10 years
m =2
Coupon rate = 10%

Find PV (Coupons)

Answer 19

In notebook

Question 20

par value = $1,000
n = 10 years
m =2
Coupon rate = 10%

Find PV (Par value)

Answer 20

Found in notebook

Question 21

par value = $1,000
n = 10 years
m =2
Coupon rate = 10%

Find Bond Value Prices

Answer 21

Found in notebook

Question 22

A bond selling par value

Answer 22

discount bond

Question 23

a bond selling in excess of its par value

Answer 23

Premium bond

Question 24

True or False

The bond’s price reflect changes in market conditions while it remains outstanding.

Answer 24

True

Question 25

True or False

The higher the yield to maturity or rb, the lower the price of the bond.

Answer 25

True

Question 26

True or False

The lower the yield to maturity for rb, the lower the price of the bond

Answer 26

False

(The lower the yield to maturity for rb, the higher the price of the bond)

Question 27

actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investments

Answer 27

Political risk