Financial management exam 2

Question 1

Bond Definition

Answer 1

Long term debt securities usually issued by a corporation or government body

Question 2

Note

Answer 2

< or equal to 10 years

Question 3

Bond

Answer 3

> than 10 years

Question 4

Mortgage Bonds

Answer 4

ABS (Asset backed securities)
Specific physical assets like PP&E

Question 5

Collateral trust bonds

Answer 5

ABS (Asset backed securities)
Specific non-physical assets like cash flow stream tied to projects like trademarks, patents, and copyrights.
EX: Bowie bonds (Pullman bonds)

Question 6

Debentures

Answer 6

Not secured by any particular assets, rely on issuers creditworthiness and reputation

Question 7

Bond indenture

Answer 7

contract between issuer and investor that specifies terms of agreement

Question 8

Face par value of a bond

Answer 8

principle to be paid at end of a loan = $1,000 for US corporate bonds

Question 9

Coupon Rate

Answer 9

the amount of the coupon payment as a % of the face value of the bond

Question 10

Coupons

Answer 10

periodic interest payments made over the life of the bond

Question 11

Maturity Date

Answer 11

when bonds face value is paid.

Question 12

Frequency of payment

Answer 12

usually semiannually for US corporate bonds

Question 13

Restrictive Covenants

Answer 13

meant to protect bond holders’ interests. restricts further debt issues, sets a max debt or debt/equity ratio

Question 14

Callability

Answer 14

Gives the company the right to retire the bonds early.
Paying a call premium
Will call back if interest rates drop.

Question 15

Convertibility

Answer 15

allows bondholders to convert their bonds into a predetermined number of shares of the issuing company’s stock

Question 16

Yield to maturity

Answer 16

the required market interest rate that makes the discounted cash flow of the bond equal to the bond’s price

Question 17

Risky bonds

Answer 17

high ytm and a lower bond price

Question 18

Safer bonds

Answer 18

low ytm and a higher bond price. “Required return”

Question 19

Bond value

Answer 19

PV of coupons + PV of par
I = YTM per coupon period for this type of bond
N = # of coupon periods until maturity

Question 20

Fixed vs variable components of a bond

Answer 20

Fixed: coupon, face value, maturity date
Variable: time to maturity, YTM
As YTM increases, prices decrease.

Question 21

Price of bond when coupon rate = YTM

Answer 21

Price of bond = face value

Question 22

When coupon rate > YTM

Answer 22

Price of bond > face value

Question 23

What is the bond price range of a (coupon-paying) bond is being issued right now for the first time

Answer 23

Bond price = $1,000

Question 24

What is the bond price range of a zero-coupon bond is being issued right now for the first time

Answer 24

bond price is < $1,000

Question 25

What is the bond price range of a (coupon-paying) bond has been downgraded several times since it was first issued

Answer 25

Bond price < $1,000

Question 26

Nominal stock return

Answer 26

Raw % return not adjusted for inflation

Question 27

Real stock return

Answer 27

Nominal less inflation