Chapter 8 Flashcards
Bondholders are also referred to as ____________.
creditors
$______ is the par value for bonds.
$1,000
Calculate the price of a corporate bond quoted at 98 ¾.
$987.50
A bond trading at a price below par is a __________ bond.
Discount Bond
A bond trading at a price of $1,000 is a ______ bond.
Par Bond
A bond trading at a price above par is a ____________ bond.
Premium
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
A bond with an 8% coupon would pay how much interest per year?
$80
Bond interest is stated ___________ and paid ________________.
annually; semi-annually
What is the formula for calculating current yield?
Annual Interest ÷ Current Market Price
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
When discussing a bond, the YTM may also be referred to as _______.
Basis
Credit risk measures the issuer’s risk of _________________________.
default on debt
_________ pay for bonds to be rated.
Issuers
What is the highest credit rating?
AAA
Bonds rated ___________ and higher are considered investment grade.
BBB or Baa
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
speculative or junk
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
false
Given a yield change, ____________ bonds move more in price.
long-term
Define real interest rate (real rate of return).
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
Which interest rates are generally more volatile?
short-term