Exam 3: Valuing Bonds

A bond has a face value of $1,000, an annual coupon rate of 7 percent, yield to maturity of 10 percent, and 20 years to maturity. The bond's duration is

The law of one price states that the same commodity must sell at the same price in a well-functioning market.

As CFO of your corporation, you would prefer (all else equal)to see the price of your corporation's bonds

A five-year bond with a 10 percent coupon rate and $1,000 face value is selling for $1,123. Calculate the yield to maturity on the bond assuming annual interest payments.

Corporate bond yields are generally higher than government bond yields for bonds having the same coupon rate and maturity.

The term structure of interest rates determines the relationship between yield to maturity and maturity.

Briefly explain what is meant by the term structure of interest rates.

One can best describe the term structure of interest rates as the relationship between

From the investor's perspective, briefly describe the cash flows associated with a bond.

The type of bonds where the identities of bond owners are recorded and the coupon interest payments are sent automatically are called

In the United States, most bonds make coupon payments annually.

U.S. Treasury bonds have almost zero default risk but are subject to inflation risk.

Define the term real interest rate.

Once a bond defaults, bondholders can no longer receive any residual payment from the bond.

The duration of any bond is the same as its maturity.

What is the relationship between real and nominal rates of interest?

Briefly explain the term yield to maturity.

The longer a bond's duration, the greater its volatility.

Which of the following bonds has the greatest volatility?

Long-term spot rates are usually higher than short-term spot rates.