Chapter 12 Part 1

Question 1

par value of a bond is the

Answer 1

amount the issuer agrees to pay the investor when the bond matures. This is also called the principal or face amount. If an investor buys a bond with a par value of $1,000, she will receive $1,000 when the bond matures. Most bonds are issued with a par value of $1,000

Question 2

The actual price that an investor pays for her bond may be significantly different from the bond’s par value. Most bonds are initially sold at

Answer 2

their par value, but some are sold for more or less than their par value. A bond that is sold for less than its par value is selling at a discount. A bond that is sold for more than its par value is selling at a premium

Question 3

Note that the price tbat an investor paid for the bond does not affect what she will receive when the

Answer 3

bond matures. She will still receive $1,000 when the bond matures regardless ofwhetber she paid $1 for the bond (an incredible discount) or $10,000 (a huge premium)

Question 4

Maturity Date

Answer 4

This is the date on which the investor will receive her $1,000 of principal.

Question 5

term bond issue

Answer 5

all of the bonds mature at the same time

Question 6

serial bond issue

Answer 6

the bonds mature sequentially. For example, Lemon County might issue bonds with a total par value of $50 million with$ IO million coming due in 2030, another $10 million due in 2031 etc.

Question 7

The price of a bond is usually stated as

Answer 7

a percentage of its par value. For example, a bond with a price of 100 is selling at 100% of its par value or $1,000. A bond with a price of 80 is selling at a discount equal to 90% of its par value or $900 (90% of$1,000). A bond with a price of 110 is selling at a premium equivalent lo 110% of its par value or $1,100

Question 8

The price of a bond can also be expressed in terms of

Answer 8

points. Each point is equal to 1 % of the bond’s par value, or $10. Thus, 90 points is equal to $900 (90 points x $10 per point= $900). A bond selling at 100 is selling for 100 points or $1,000. If the bond’s price increases to 101, it has increased by one point. It is now selling for $1,010 (101 % of the par value)

Question 9

bond price 90

Answer 9

percentage of par value: 90%; price in dollars: $900; discount/premium: discount

Question 10

bond price 100

Answer 10

percentage of par value: 100%; price in dollars: $1000; discount/premium: par

Question 11

bond price 110

Answer 11

percentage of par value: 110%; price in dollars: $1100; discount/premium: premium

Question 12

coupon rate

Answer 12

The issuer must agree to pay the investors interest until the bond matures. The rate of interest is generally fixed at the time the bond is issued and, with some exceptions, remains the same for the life of the bond. This fixed rate of interest

Question 13

In order to determine the amount of interest that the investor will receive annually, multiply the

Answer 13

bond’s stated interest rate by the bond’s par value ($1,000). For example, if a bondholder purchases a 10% Lemon County Bond, she will receive $100 a year.

Question 14

Since bonds usually pay interest

Answer 14

twice a year (semiannually), the investor will receive two payments every yearof$50 each ($100/2 = $50)

Question 15

The bonds maturity date determines when she will receive her interest payments. One of the payment dates will be

Answer 15

the maturity day and month and the other will be six months later. Eveiy six months she will receive a semiannual interest payment until the maturity date.

Question 16

Zero-coupon bonds are an exception to the general rule that bonds pay interest twice a year. The main difference between zero-coupon bonds and regular bonds is that zero-coupon bonds

Answer 16

do not pay interest al regular inteivals. Instead, an investor purchases a zero coupon at a deep discount from its par value. The investor then redeems the bond for its full face value when it matures. The difference between the purchase price and the amount that the investor receives when the bond matures is the interest. Investors who purchase zero-coupon bonds often buy them because they are going to need a lump sum of money at some future date

Question 17

Bonds come in three different forms

Answer 17

bearer, registered and book-entry

Question 18

a bearer bond belongs to

Answer 18

“whomever is carrying it around (bearing it). The owner’s name is not recorded–either on the bond itself or in the issuer’s records. The bond has interest coupons attached that work similar to a check. Whenever an interest payment is due, the bondholder clips the coupon and takes it to the bank to receive the payment. (Hence, the origin of the terms coupon rate for bonds that make periodic interest payments and zero-coupon bonds for bonds that do not.) Bearer bonds are no longer issued in the United States, although they are still common in some
foreign countries.”

Question 19

A registered bond has the

Answer 19

“owner’s name on both the bond itself and in the
issuer’s records. There are no interest coupons attached to registered bonds. The issuer sends the principal and interest payments to the registered owner only. If the owner wants to transfer the bond, he signs his name in the appropriate space on the back of the bond (endorses it) and the issuer makes the necessary changes in its records”

Question 20

An investor who purchases a book-entry bond

Answer 20

does not receive a physical piece of paper. The issuer simply enters the owner’s name and address on its records (books). These types of bonds are becoming increasingly more popular since they cut down on paperwork and investors do not need to worry about their bonds being lost or stolen