CHAPTER 6 Flashcards
Bonds are a securities sold by governments and corporations to raise money
from investors today in exchange for promised future payments.
YES
The time remaining until the repayment date is known as the term of the bond.
YES
By convention the coupon rate is expressed as an effective annual rate.
NO
Bonds typically make two types of payments to their holders.
YES
The bond certificate indicates the amounts and dates of all payments to be made.
YES
The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.
NO
The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.
YES
Usually the face value of a bond is repaid at maturity.
YES
Treasury bills are zero-coupon bonds.
YES
Bond traders typically quote bond prices rather than bond yields.
NO
The yield to maturity is typically stated as an annual rate by multiplying the
calculated YTM by the number of coupon payment per year, thereby converting
it to an APR.
YES
Zero-coupon bonds always trade at a discount.
YES
Because we can convert any bond price into a yield, and vice versa, bond prices
and yields are often used interchangeably.
YES
The IRR of an investment in a bond is given a special name, the yield to maturity
(YTM).
YES
Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no
simple formula to solve for the yield to maturity directly.
NO
One advantage of quoting the yield to maturity rather than the price is that the
yield is independent of the face value of the bond.
YES
The IRR of an investment opportunity is the discount rate at which the NPV of
the investment opportunity is equal to zero.
YES
The yield to maturity for a zero-coupon bond is the return you will earn as an
investor from holding the bond to maturity and receiving the promised face
value payment.
YES
When prices are quoted in the bond market, they are conventionally quoted in
increments of $1000.
NO
Zero-coupon bonds are also called pure discount bonds.
YES
Coupon bonds always trade for a discount.
NO
If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond.
YES
At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price.
YES
Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.
YES
If a coupon bond’s yield to maturity exceeds its coupon rate, the present value of
its cash flows at the yield to maturity will be greater than its face value.
NO
The price of the bond will drop by the amount of the coupon immediately after
the coupon is paid.
YES
A bond trades at par when its coupon rate is equal to its yield to maturity.
YES
The clean price of a bond is adjusted for accrued interest.
YES
If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
NO
When a coupon-paying bond is trading at a premium, an investor’s return from the coupons is diminished by receiving a face value less than the price paid for the bond.
YES
Holding fixed the bond’s yield to maturity, for a bond not trading at par, the present value of the bond’s remaining cash flows changes as the time to maturity decreases.
YES
A bond that trades at a premium is said to trade above par.
YES
Prices of bonds with lower durations are more sensitive to interest rate changes.
NO
Coupon bonds may trade at a discount, at a premium, or at par.
YES
The sensitivity of a bond’s price changes in interest rates is the bond’s duration.
YES
When a bond is trading at a discount, the price increase between coupons will
exceed the drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time passes.
YES
The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the current yield.
NO
The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the zero coupon yield.
NO
The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the yield to maturity.
YES
The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the discount yield.
NO
By convention, practitioners always plot the yield of the most senior issued
bonds, termed the on-the-run-bonds.
NO
We can determine the no-arbitrage price of a coupon bond by discounting its
cash flows using the zero-coupon yields.
YES
The yield to maturity of a coupon bond is a weighted average of the yields on
the zero-coupon bonds.
YES
If the zero coupon yield curve is upward sloping, the resulting yield to maturity
decreases with the coupon rate of the bond.
YES
When the yield curve is flat, all zero-coupon and coupon-paying bonds will
have the same yield, independent of their maturities and coupon rates.
YES
Given the spot interest rates, we can determine the price and yield of any other
default-free bond.
YES
As the coupon increases, earlier cash flows become relatively less important than
later cash flows in the calculation of the present value.
NO
When U.S. bond traders refer to “the yield curve,” they are often referring to the
coupon-paying Treasury yield curve.
YES
A corporate bond which receives a BBB rating from Standard and Poor’s is considered an investment grade bond.
YES
Because the cash flows promised by the bond are the most that bondholders can
hope to receive, the cash flows that a purchaser of a bond with credit risk expects
to receive may be less than that amount.
YES
A higher yield to maturity does not necessarily imply that a bond’s expected
return is higher.
YES
By consulting bond ratings, investors can assess the credit-worthiness of a
particular bond issue.
YES
Because the yield to maturity for a bond is calculated using the promised cash
flows, the yield of bond’s with credit risk will be lower than that of otherwise identical default-free bonds.
NO
A bond’s rating depends on the risk of bankruptcy as well as the bondholder’s
ability to lay claim to the firm’s assets in the event of a bankruptcy.
YES
Bonds in the top four categories are often referred to as investment grade bonds.
YES
Bond ratings encourage widespread investor participation and relatively liquid markets.
YES
Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy.
NO
Sovereign debt is always riskless.
NO
Sovereign debt is debt denominated in soverreigns.
NO
Sovereign debt is debt issued by national governments.
YES
A key difference between sovereign default and corporate bonds is that unlike corporate debt, sovereign debt prices are not inverse to yields.
NO
A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.
YES
A key difference between sovereign default and corporate bonds is that unlike a corporation, any country can turn to the EMU to pay off its debts.
NO
A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations
is can not default.
NO
Forward interest rates tend to be biased downward as predictors of future spot rates when the yield
curve is upward sloping.
NO
Forward interest rates tend to be biased upward as predictors of future spot rates when the yield curve
is downward sloping.
NO
Forward interest rates tend not to be good predictors of future spot rates.
YES
Forward interest rates accurately predict future spots rates because of the law of one price.
NO
If investors did not care about risk, then they would be indifferent between
investing in a two-year bond and investing in a one-year bond and rolling over
the money in one-year.
YES
In general, the expected future spot interest rate will reflect investor’s preferences
toward the risk of future interest rate fluctuations.
YES
When we refer to the one-year forward rate for year 5, we mean the rate
available today on a one-year investment that begins four years from today and
is repaid five years from today.
YES
In general, we can compute the forward rate for year n by comparing an
investment in an n-year, zero-coupon bond to an investment in an (n + 1) year, zero-coupon bond, with the interest rate earned in the nth year being guaranteed through an interest rate forward contract.
NO
