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Principles of Finance > Chapter 7 - Bonds > Flashcards

Chapter 7 - Bonds Flashcards

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1
Q

What is an IOU that obligates the issuer of the bond to pay the holder of the bond the face value at the bond’s maturity and sometimes the coupon rate payments during the life of the bond?

A

A straight bond

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2
Q

What is the bond’s face value also known as?

A

Par value

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3
Q

When is the par value paid?

A

At the maturity date

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4
Q

What is the stated interest rate paid by the issuer?

A

The coupon interest rate

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5
Q

Is the coupon rate fixed or variable?

A

Fixed

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6
Q

What is the length of time until the bond must be repaid called?

A

The maturity date

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7
Q

What is the date when the bond was issued called?

A

The issued date

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8
Q

What is the rate of return earned on a bond held until maturity called?

A

The yield of maturity

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9
Q

What is a protection against a drop in interest rates for the bond issuer?

A

A callable bond

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10
Q

When do companies call the bond?

A

When the market rate significantly drops

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11
Q

What is it called when you buy back a bond little by little before the end of the maturity date?

A

A sinking fund

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12
Q

What does N represent in the bond formula?

A

The number of coupon payments

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13
Q

What does I represent in the bond formula?

A

The market interest rate/ the yield to maturity

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14
Q

What does PV represent in the bond formula?

A

The bond selling price

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15
Q

What does PMT represent in the bond formula?

A

Coupon amount

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16
Q

What does FV represent in the bond formula?

A

Face value

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17
Q

What type of line does a par bond have on a graph?

A

A straight line

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18
Q

What type of line does a discount bond have on a graph?

A

An upward sloping line

19
Q

What type of line does a premium bond have on a graph?

A

A downward sloping line

20
Q

True or False:

At maturity, the value of any bond must equal its par value

A

True

21
Q

When will a premium bond stop decreasing over time?

A

When it reaches face/par value

22
Q

When will a discount bond stop increasing over time?

A

When it reaches face/par value

23
Q

What are the 2 formula to find the current yield (CY)?

A
  1. (Annual coupon payment/bond selling price) x 100

2. (PMT/PV) x 100

24
Q

What are the 2 formulas to find the capital gains yield (CGY)?

A
  1. YTM - current yield

2. (Bond selling price - Bond purchase price) / Bond purchase price

25
Q

What is the formula to find the expected rate of return?

A

CY + CGY

26
Q

What is the expected total return equal to?

A

YTM

27
Q

What is not useful for callable bonds?

A

YTM

28
Q

What type of risk do holders of bonds face?

A

An interest rate risk

29
Q

What is an interest rate risk also known as?

A

A price risk

30
Q

What is the possibility that changes in interest rates will result in losses in the bond’s value?

A

The interest rate risk

31
Q

What is the yield actually earned or “realized” on a bond?

A

The realized yield

32
Q

What is the realized yield is almost never equal to?

A

The yield to maturity

33
Q

What is the formula to find PMT?

A

Face value x coupon rate

34
Q

In what two instances is a bond considered a par bond?

A
  1. Bond selling price(PV) = face value(1000)

2. YTM(I) = coupon rate

35
Q

In what two instances is a bond considered a discount bond?

A
  1. Bond selling price(PV) < face value(1000)

2. YTM(I) > coupon rate

36
Q

In what two instances is a bond considered a premium bond?

A
  1. Bond selling price(PV) > face value(1000)

2. YTM(I) < coupon rate

37
Q

How do you calculate N if the coupon bond is semiannually?

A

N x 2

38
Q

How do you calculate I if the coupon bond is semiannually?

A

I / 2

39
Q

How do you calculate PMT if the coupon bond is semiannually?

A

PMT / 2

40
Q

Find the price of a semiannual coupon bond given that the coupon rate = 7%, the face value = $1000, the required return = 6%, and there are 5 years remaining until maturity.

  1. Calculate N
  2. Calculate I
  3. Calculate PMT
A
  1. N = 5 x 2 = 10
  2. I = 6% / 2 = 3%
  3. PMT = (1000 x 7%) / 2 = 35
41
Q

Solve the problem:

Find the yield to maturity on a semiannual coupon bond given that the bond price = $1111, the coupon rate = 10%, the face value = $1000, and there are 8 years remaining until maturity.

A 
N = 8 x 2 = 16
PV = 1111
PMT = (1000 x 10%) / 2 = 50
FV = 1000

I = 4.04% x 2 = 8.09%

42
Q

Solve the problem:

Find the coupon rate on a semiannual coupon bond given that the bond price = $1111, the yield of maturity = 10%, the face value = $1000, and there are 8 years remaining until maturity.

A 
N = 16
I = 10/2 = 5%
PV = 1111(-)
FV = 1,000
PMT = (60.24 x 2) / 1000
PMT = 120.48/ 1000 = 12.1
43
Q

Solve the problem:

Find the current yield and the capital gains yield for a 10-year, 9% annual coupon bond that sells for $887, and has a face value of $1,000.

A 
N = 10
I = 10.9117%
PV = $887
PMT = $90
FV = $1,000
YTM = CY + CGY
CY = PMT / PV
CY = 90 / 887 = 10.15%
  1. 9117 = 10.15 + CGY
  2. 9117 - 10.15 = CGY
  3. 7617% = CGY

Principles of Finance (8 decks)

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