FNCE chapter 6- Bond valuation

Question 1

debt

Answer 1

a loan to a firm, government, or individual

Question 2

three debts identifying features

Answer 2

principal amount that must be repaid
interest payments
time to maturity

Question 3

maturity date

Answer 3

the date on which the principal amount of debt is due

Question 4

discounted securities

Answer 4

securities selling for less than par value

Question 5

certificate of deposit

Answer 5

an interest-earning time deposit at a bank or other financial intermediary

Question 6

money market mutual funds

Answer 6

pools of funds managed by investment companies that are primarily invested in short-term financial assets

Question 7

bond

Answer 7

a long-term debt instrument

Question 8

coupon rate

Answer 8

interest paid on a bond or other debt instruments stated as a percentage of its face value

Question 9

term loan

Answer 9

a loan, on which the borrower agrees to make a series of payments consisting of interest and principal

Question 10

income bond

Answer 10

a bond that pays interest to the holder only if the interest is earned by the firm

Question 11

putable bond

Answer 11

a bond that can be redeemed by the bondholders option when certain circumstances exist

Question 12

floating-rate bond

Answer 12

a bond whose interest rate fluctuates with shifts in the general level of interest rates

Question 13

zero coupon bond

Answer 13

a bond that pays no annual interest but sells at a discount below par

Question 14

junk bond

Answer 14

a high risk, high yield bond

Question 15

indenture

Answer 15

a formal agreement between the issuer of a bond and the bondholders

Question 16

call provision

Answer 16

a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date

Question 17

LIBOR

Answer 17

London interbank offer rate

Question 18

yield to maturity (YTM)

Answer 18

the average rate of return earned on a bond if it is held to maturity

Question 19

yield to call

Answer 19

the average rate of return earned on a bond if it is held until the first call date

Question 20

current yield

Answer 20

the interest payment divided by the market price of the bond

Question 21

capital gains yield

Answer 21

the percentage change in the market price of the bond

Question 22

the higher the coupon rate

Answer 22

the higher the market price of a bond

Question 23

when interest rates change

Answer 23

the values of bonds change in an opposite direction

Question 24

the market value of a bond will always approach its par value when

Answer 24

its maturity date approaches