Exam 14: The Valuation of Fixed-Income Securities

The current yield exceeds the yield to maturity if interest rates fall.

If a $1,000 bond costs $1,000 and pays $50 interest, 1. the current yield is 5 percent 2. the yield to maturity is 5 percent 3. the bond is selling for par

If a bond pays $90 interest annually, matures after ten years, and costs $1,100, the current yield is

The term and duration of a bond are equal for zero coupon bonds.

Bonds that are callable often have a call penalty.

A call penalty is a payment made to the firm to encourage early retirement of the bond.

Preferred stock and long-term bonds are similar because

An investor may expect a bond to be called if its current yield exceeds the yield to maturity.

Since preferred stock pays a fixed dividend, it is often valued as if it were a bond.

The concept of duration considers

Matching a bond's duration with the time the funds are needed reduces reinvestment risk.

A bond with a 5 percent coupon ($50 a year)that matures after eight years is selling for $779. What is the yield to maturity?

If a $1,000 bond with a 7 percent coupon were to sell for $978, the current interest rate exceeds 7 percent.

The concept of duration stresses when a bond will make its payments to bondholders.

If interest rates have fallen, a firm may prefer to repurchase the bonds on the market instead of calling and redeeming them.

Buying a bond with a duration equal to when the funds are needed

From the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

The prices of zero coupon bonds fluctuate less than bonds with large coupons.

The current yield on a long-term bond is the

If interest rates rise, the price of preferred stock