CHapter 7

Question 1

the stated interest payment made on a bond

Answer 1

coupon

Question 2

the principal amount of a bond that is repaid at the end of the term

Answer 2

face value / par value
(assume $1000 unless specifically told otherwise)

Question 3

the annual coupon divided by the face value of a bond

Answer 3

coupon rate

Question 4

the specified date on which the principal amount of a bond is paid

Answer 4

maturity

Question 5

are debt securities
- we will use this tem generically to refer to long term debt

Answer 5

bonds

Question 6

the coupon is a

Answer 6

dollar amount

Question 7

the coupon rate is

Answer 7

annual

Question 8

are effectively interest only loans

Answer 8

bonds
(no principal repayment is made until redemption)

Question 9

the rate required in the market on a bond

Answer 9

yield to maturity (YTM)

Question 10

when the bond price is less than the face value / par value

Answer 10

discount bond

Question 11

YTM > coupon rate

Answer 11

discount bond

Question 12

when the bond price is more than the face value / par value

Answer 12

premium bond

Question 13

YTM < coupon rate

Answer 13

Premium bond

Question 14

bond value =

Answer 14

bond value =
present value of the coupons + present value of the face amount

Question 15

bond prices and interest rates have an _____ relationship

Answer 15

inverse

Question 16

if the yield to maturity on a bond increases, then the price of the bond will

Answer 16

decrease

Question 17

if th yield to maturity on a bond decreases, then the price of the bond will

Answer 17

increase

Question 18

if YTM > coupon rate then bond price is __ par value

Answer 18

bond price < par value
(discount bond)

Question 19

if YTM < coupon rate then the bond price is __ par value

Answer 19

bond price > par value
(premium bond)

Question 20

the risk that arises for bond owners from fluctuating interest rates

Answer 20

interest rate risk / maturity risk

Question 21

the longer the time to maturity the _____ the interest rate risk

Answer 21

the greater

Question 22

the lower the coupon rate the _____ the interest risk

Answer 22

greater

Question 23

a bonds annual coupon divided by its price

Answer 23

current yield

Question 24

• only considers the coupon portion of your return
• does not factor in time

Answer 24

current yield

Question 25

current yield > coupon rate

Answer 25

discount bond

Question 26

current yield < coupon rate

Answer 26

premium bond

Question 27

securities issued by corporation may be classified as

Answer 27

equity securities and debt securities

Question 28

• debt is not an ownership interest in the firm
• the corporations payment of interst on debt is considered a cost of doing business and is tax deductible (dividends paid to stockholders are not tax deductible)
• unpaid debt is a liability of the firm (if not paid the creditors can legally claim the assets of the firm) (can result in liquidation or reorganization, two of the possible consequences of bankruptcy)

Answer 28

the main differences between debt and equity

Question 29

debt securities with maturities of one year or less

Answer 29

short term debt

Question 30

refers to debt securities with maturities of more than one year

Answer 30

long term debt

Question 31

2 major forms of long term debt

Answer 31

1. public issue
2. privately placed