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Questions and Answers
The current yield on a bond is equal to the annual interest divided by the:
The current yield on a bond is equal to the annual interest divided by the:
Which statement is true?
Which statement is true?
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond?
A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond?
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Bond ratings classify bonds based on:
Bond ratings classify bonds based on:
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An agent who buys and sells securities from inventory is called a:
An agent who buys and sells securities from inventory is called a:
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Which one of the following must equal zero if a firm pays a constant annual dividend?
Which one of the following must equal zero if a firm pays a constant annual dividend?
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Dividends are:
Dividends are:
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Which one of the following statements is correct?
Which one of the following statements is correct?
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The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
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The internal rate of return is the:
The internal rate of return is the:
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What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.
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Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?
Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?
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The term structure of interest rates represents the relationship between which of the following?
The term structure of interest rates represents the relationship between which of the following?
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Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
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When a bond's yield to maturity is less than the bond's coupon rate, the bond:
When a bond's yield to maturity is less than the bond's coupon rate, the bond:
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Which one of the following statements is true?
Which one of the following statements is true?
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All else held constant, the price of a bond increases when the:
All else held constant, the price of a bond increases when the:
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Which one of the following bonds is the most sensitive to changes in market interest rates?
Which one of the following bonds is the most sensitive to changes in market interest rates?
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An unexpected decrease in market interest rates will cause a:
An unexpected decrease in market interest rates will cause a:
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Study Notes
Bond Fundamentals
- Current yield on a bond is calculated using annual interest divided by current market price.
- True statement regarding bonds: An indenture is a formal agreement between the bond issuer and bondholders.
- If inflation decreases, the term structure of interest rates is likely to be downward sloping.
Bond Characteristics
- A semiannual 5.4% coupon bond can have any maturity date if currently selling at par value.
- Bond ratings primarily assess default risk among various categories.
- A dealer is an agent who actively buys and sells securities from inventory.
Dividends and Returns
- If a firm pays a constant annual dividend, the capital gains yield must equal zero.
- Dividends paid by firms come from after-tax profits, not tax-deductible expenses.
- Payback period ignores time value of money, evaluating projects primarily on cash flow recovery time.
Financial Metrics
- Internal rate of return (IRR) is defined as the discount rate that makes the net present value (NPV) of a project equal to zero.
- For coupon bonds, when the market price equals par, the coupon rate matches both current yield and yield to maturity.
Bond Types
- A zero coupon bond sells at a deep discount, providing a single payment at maturity.
- The term structure of interest rates relates nominal rates on default-free bonds to their time to maturity.
- Additional compensation to bondholders to mitigate default risks is known as the default risk premium.
Market Sensitivity
- Bonds with coupon rates lower than the current yield are selling at a premium.
- A bond’s price increases when the yield to maturity decreases, indicating inverse relationship dynamics.
- 10-year zero coupon bonds are most sensitive to changes in market interest rates due to longer duration without cash flows.
Interest Rate Impact
- An unexpected drop in market interest rates will decrease yields to maturity for coupon bonds and impact zero coupon bond prices.
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Description
Test your knowledge with these finance flashcards focused on bond yields and related concepts. Each card presents a question and multiple-choice answers to gauge your understanding of key finance principles. Perfect for exam preparation!
