Exam 12: The Bond Market

(I)The coupon rate is the rate of interest that the issuer of the bond must pay. (II)The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors.

(I)To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II)The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.

The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt.

What role do restrictive covenants play in bond markets?

A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called

Compared to money market securities, capital market securities have

Restrictive covenants can

(I)Callable bonds usually have a higher yield than comparable noncallable bonds. (II)Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.