Podcast
Questions and Answers
What is the main focus of reading 15.1 - 15.3 on Options?
What is the main focus of reading 15.1 - 15.3 on Options?
Which learning objective discusses the computation of a bond’s price given its yield to maturity?
Which learning objective discusses the computation of a bond’s price given its yield to maturity?
What does Learning Objective 10-4 focus on?
What does Learning Objective 10-4 focus on?
What is the main topic of reading 12.6 on Business Cycles?
What is the main topic of reading 12.6 on Business Cycles?
Signup and view all the answers
Which type of bonds offer lower coupon rates and yields to maturity, but their actual returns may exceed the stated yield if the option to convert becomes profitable?
Which type of bonds offer lower coupon rates and yields to maturity, but their actual returns may exceed the stated yield if the option to convert becomes profitable?
Signup and view all the answers
What feature do some corporate bonds have that allows the issuer to repurchase the bond at a specified call price before maturity?
What feature do some corporate bonds have that allows the issuer to repurchase the bond at a specified call price before maturity?
Signup and view all the answers
What do safer bonds with higher ratings offer in terms of yields to maturity?
What do safer bonds with higher ratings offer in terms of yields to maturity?
Signup and view all the answers
What do puttable bonds give the bondholder the option to do?
What do puttable bonds give the bondholder the option to do?
Signup and view all the answers
What is the basis for accrued interest on a bond?
What is the basis for accrued interest on a bond?
Signup and view all the answers
How are bond prices quoted?
How are bond prices quoted?
Signup and view all the answers
Where do corporate bonds trade?
Where do corporate bonds trade?
Signup and view all the answers
What contributes to the thinness of the bond market?
What contributes to the thinness of the bond market?
Signup and view all the answers
What information is included in corporate bond listings?
What information is included in corporate bond listings?
Signup and view all the answers
What do some corporate bonds come with that allows the issuer to repurchase the bond at a specified call price before maturity?
What do some corporate bonds come with that allows the issuer to repurchase the bond at a specified call price before maturity?
Signup and view all the answers
What do convertible bonds give bondholders the option to exchange the bond for?
What do convertible bonds give bondholders the option to exchange the bond for?
Signup and view all the answers
What does the sale price of a bond include?
What does the sale price of a bond include?
Signup and view all the answers
What type of bonds depend on specific events like earthquakes or pandemics?
What type of bonds depend on specific events like earthquakes or pandemics?
Signup and view all the answers
Which type of bonds offer higher coupon rates to compensate for the risk of losing part or all of the investment in a catastrophe?
Which type of bonds offer higher coupon rates to compensate for the risk of losing part or all of the investment in a catastrophe?
Signup and view all the answers
Which bonds make payments tied to a general price index or commodity prices?
Which bonds make payments tied to a general price index or commodity prices?
Signup and view all the answers
How are TIPS bond cash flows calculated based on inflation rates?
How are TIPS bond cash flows calculated based on inflation rates?
Signup and view all the answers
What was the real yield on TIPS bonds for a 30-year maturity in early 2020?
What was the real yield on TIPS bonds for a 30-year maturity in early 2020?
Signup and view all the answers
What influences the present value of future cash flows for bond pricing?
What influences the present value of future cash flows for bond pricing?
Signup and view all the answers
What happens to the present value of each dollar of cash flow from a bond as market interest rates rise?
What happens to the present value of each dollar of cash flow from a bond as market interest rates rise?
Signup and view all the answers
What are the additional premiums for bond-specific characteristics that influence bond pricing?
What are the additional premiums for bond-specific characteristics that influence bond pricing?
Signup and view all the answers
What is used to discount future cash flows for bond pricing?
What is used to discount future cash flows for bond pricing?
Signup and view all the answers
What may benefit from a single interest rate for discounting cash flows?
What may benefit from a single interest rate for discounting cash flows?
Signup and view all the answers
What are debt securities also known as?
What are debt securities also known as?
Signup and view all the answers
Why are debt securities, such as bonds, relatively easy to understand?
Why are debt securities, such as bonds, relatively easy to understand?
Signup and view all the answers
What is the bond indenture?
What is the bond indenture?
Signup and view all the answers
How are zero-coupon bonds different from regular bonds?
How are zero-coupon bonds different from regular bonds?
Signup and view all the answers
What are Treasury notes?
What are Treasury notes?
Signup and view all the answers
How are bond prices quoted?
How are bond prices quoted?
Signup and view all the answers
What does the yield to maturity measure?
What does the yield to maturity measure?
Signup and view all the answers
What is the difference between Treasury notes and Treasury bonds?
What is the difference between Treasury notes and Treasury bonds?
Signup and view all the answers
How are zero-coupon bonds issued?
How are zero-coupon bonds issued?
Signup and view all the answers
What determines the investor's return from zero-coupon bonds?
What determines the investor's return from zero-coupon bonds?
Signup and view all the answers
How are bond prices quoted in the market?
How are bond prices quoted in the market?
Signup and view all the answers
What must a buyer pay if a bond is purchased between coupon payments?
What must a buyer pay if a bond is purchased between coupon payments?
Signup and view all the answers
Which type of bond has a dividend rate linked to current market interest rates and is adjusted at regular intervals?
Which type of bond has a dividend rate linked to current market interest rates and is adjusted at regular intervals?
Signup and view all the answers
What do foreign bonds denominated in the currency of the country in which they are marketed include?
What do foreign bonds denominated in the currency of the country in which they are marketed include?
Signup and view all the answers
What do international bonds denominated in one currency but sold in other national markets include?
What do international bonds denominated in one currency but sold in other national markets include?
Signup and view all the answers
What are innovative bonds with unusual features, such as bonds with maturities ranging from 50 to 100 years and inverse floaters, examples of?
What are innovative bonds with unusual features, such as bonds with maturities ranging from 50 to 100 years and inverse floaters, examples of?
Signup and view all the answers
What did the British government issue in the 18th century with infinite maturity, making them perpetuities?
What did the British government issue in the 18th century with infinite maturity, making them perpetuities?
Signup and view all the answers
What do municipal bonds issued by state and local governments have?
What do municipal bonds issued by state and local governments have?
Signup and view all the answers
What do floating-rate bonds have coupon rates that reset periodically according to?
What do floating-rate bonds have coupon rates that reset periodically according to?
Signup and view all the answers
What do preferred stock dividends offer a tax advantage to?
What do preferred stock dividends offer a tax advantage to?
Signup and view all the answers
What are Eurobonds denominated in and sold in other national markets?
What are Eurobonds denominated in and sold in other national markets?
Signup and view all the answers
What are floating-rate preferred stock dividends linked to?
What are floating-rate preferred stock dividends linked to?
Signup and view all the answers
What do failure to pay dividends on preferred stock result in?
What do failure to pay dividends on preferred stock result in?
Signup and view all the answers
What do innovative bond designs illustrate about bond structures?
What do innovative bond designs illustrate about bond structures?
Signup and view all the answers
Study Notes
Bond Characteristics and Valuation Principles
- Debt securities are also known as fixed-income securities and promise either a fixed stream of income or income determined by a specified formula.
- Debt securities, such as bonds, are relatively easy to understand due to their specified payment formulas and minimal uncertainty about cash flows.
- The bond is the basic debt security, and the chapter provides an overview of bond markets, including Treasury, corporate, and international bonds.
- The coupon rate, maturity date, and par value of the bond are part of the bond indenture, which is the contract between the issuer and the bondholder.
- Bonds are usually issued with coupon rates set just high enough to induce investors to pay par value to buy the bond.
- Zero-coupon bonds make no coupon payments and are issued at prices considerably below par value, with the investor's return coming solely from the difference between issue price and the payment of par value at maturity.
- Treasury notes are issued with original maturities between 1 and 10 years, while Treasury bonds are issued with maturities ranging from 10 to 30 years.
- The prices of bonds are quoted as a percentage of par value, and the yield to maturity is often interpreted as a measure of the average rate of return to an investor who purchases the bond for the asked price and holds it until its maturity date.
- The quoted bond prices do not include the interest that accrues between coupon payment dates, and if a bond is purchased between coupon payments, the buyer must pay the seller for accrued interest, the prorated share of the upcoming semiannual coupon.
Bonds and Preferred Stock Overview
- Floating-rate bonds have coupon rates that reset periodically according to a specified market rate, subject to credit risk and price fluctuations.
- Preferred stock, though considered equity, promises a specified cash flow stream similar to bonds, but failure to pay dividends results in cumulative owed dividends.
- Floating-rate preferred stock, like floating-rate bonds, has a dividend rate linked to current market interest rates and is adjusted at regular intervals.
- Preferred stock dividends are not tax-deductible expenses, reducing their attractiveness as a source of capital to issuing firms, but they offer a tax advantage to corporations.
- Municipal bonds issued by state and local governments have tax-free interest payments.
- International bonds include foreign bonds, denominated in the currency of the country in which they are marketed, and Eurobonds, denominated in one currency but sold in other national markets.
- Foreign bonds sold in the U.S. are called Yankee bonds, while Eurobonds fall outside U.S. jurisdiction and are not regulated by U.S. federal agencies.
- Issuers constantly develop innovative bonds with unusual features, such as bonds with maturities ranging from 50 to 100 years and inverse floaters, where the coupon rate falls when interest rates rise.
- The British government issued consols in the 18th century with infinite maturity, making them perpetuities.
- Innovative bond designs illustrate the flexibility of bond structures and the potential variety in security design.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your knowledge of bond characteristics and valuation principles with this quiz. Explore topics such as debt securities, bond indenture, coupon rates, Treasury bonds, yield to maturity, and innovative bond designs. Additionally, learn about preferred stock, municipal bonds, and international bonds, including Eurobonds and Yankee bonds.
