Questions and Answers
Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called __________.
horizon analysis
The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and __________.
0.5%; 0.8%
If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.
decrease
In an era of particularly low-interest rates, which of the following bonds is most likely to be called?
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Bonds with coupon rates that fall when the general level of interest rates rise are called __________.
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In the event of bankruptcy, you hold a subordinated debenture. You will be paid off before which one of the following?
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If the yields to maturity on two bonds, A and B, change from 12% to 14%, what will happen to their values?
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On average, one would expect investors to require __________.
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The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are __________.
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The total annual coupon income you will receive in year 3 for a TIPS at issue at par for $1,000 with a 3% coupon and inflation of 2%, 3%, and 4% is __________.
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TIPS are an example of?
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A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.
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To earn a high rating from the bond rating agencies, a company would want to have:
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TIPS offer investors inflation protection by __________ by the inflation rate each year.
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The primary difference between Treasury notes and bonds is?
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In regard to bonds, convexity relates to the __________.
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If you are holding a premium bond, you must expect a __________ each year until maturity. If you are holding a discount bond, you must expect a __________ each year until maturity.
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Study Notes
Bond Return Analysis
- Horizon analysis examines bond returns over multiple years, factoring in yield to maturity and reinvestment rate of coupons.
Default Risk Premiums
- For High Country Marketing Corp.'s bonds, the default risk premiums for the 1-year and 5-year bonds are 0.5% and 0.8%, respectively, calculated from yield differences.
Expectations Theory
- A downward-sloping yield curve indicates that investors anticipate a decrease in future short-term interest rates.
Callable Bonds
- In low-interest rate environments, coupon bonds selling at a premium are most likely to be called.
Inverse Floaters
- Bonds with coupon rates that decrease when general interest rates increase are known as inverse floaters.
Subordinated Debentures
- In the event of bankruptcy, holders of subordinated debentures will be paid off after preferred stockholders.
Bond Price Sensitivity
- When yields to maturity increase from 12% to 14%, both bonds A and B will decrease in value, with bond B declining more due to its longer maturity.
Liquidity Preference Theory
- This theory suggests that investors typically require a higher yield on long-term bonds compared to short-term bonds.
Bond Ratings
- A rating of C from Moody's identifies bonds from Elbow Grease Dishwashing Company as junk bonds, denoting high risk.
TIPS and Inflation
- TIPS (Treasury Inflation-Protected Securities) indexed bonds offer inflation protection by increasing both par value and coupon payments in line with inflation rates.
Puttable Bonds
- A puttable bond allows the bondholder to redeem it before maturity at a predetermined price after a specified date.
Bond Ratings and Financial Ratios
- Companies aiming for high bond ratings should focus on maintaining a low debt-to-equity ratio and a high quick ratio.
Treasury Notes vs. Bonds
- The main distinction lies in maturity; Treasury notes have maturities of 1 to 10 years, while Treasury bonds span 10 to 30 years.
Convexity of Bond Prices
- Convexity refers to the curvature of the bond price as it relates to changes in interest rates, indicating how price sensitivity varies with rate changes.
Capital Expectation for Bonds
- Premium bonds are expected to incur a capital loss each year until maturity, whereas discount bonds are expected to yield a capital gain until maturity.
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Description
Test your knowledge with this study guide focusing on chapters 7 and 10 of 'Intro To Investments'. The quiz covers important concepts such as horizon analysis and yield comparisons. Perfect for anyone preparing for their investments course.
