Exam 13: The Bond Market

Variable interest rate bonds

In most cases, interest accrues daily on long-term bonds but distributed only twice a year.

A publicly held bond has a trustee who enforces the terms of the indenture.

A firm may not repurchase bonds at a discount.

As the length of time to maturity (i.e., the term)of a bond increases, generally

One source of risk associated with investments in bonds is the possibility of default.

The current yield and the yield to maturity are equal if a bond sells for its par value.

The accrued interest on a bond

A split coupon bond

In a typical bond classification

Risk to bondholders comes from 1. possibility of default 2. higher interest rates 3. higher inflation

A company may call a bond if

Since bonds are legal obligations, there is little risk associated with purchasing these securities.

A bond's seller pays accrued interest to the buyer.

A call penalty protects the firm from early retirement of the bond.

The structure of yields generally suggests that long-term bonds have greater yields.

A firm will exercise its option to call a bond if interest rates rise.

A bond with a balloon payment cannot have a sinking fund.

Bonds with comparable ratings but different terms to maturity tend to have different yields.

A negatively sloped yield curve suggests   1. short-term rates exceed long-term rates 2. long-term rates exceed short-term rates 3. the Federal Reserve is following a tight monetary policy 4. the Federal Reserve is following an easy monetary policy