Exam 6: Interest Rates and Bond Valuation

The liquidity preference theory suggests that short-term interest rates should be lower than long-term interest rates.

ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________.

________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time.

The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.

Deeply discounted bond that pays no coupon interest is a ________.

To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.

________ rate of interest is the actual rate charged by the supplier and paid by the demander of funds.

A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of being exercised (to the benefit of the bondholder) if market interest rates have fallen since the bond was issued.

If the coupon rate of a bond is equal to its required rate of return, then ________.

A nominal rate of interest is equal to the sum of the real rate of interest plus the risk free rate of interest.

What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent?

To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________.

The reason for a difference in the yield between a Aaa corporate bond and an otherwise identical Baa bond is the risk premium; other things being equal.

Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?

Table 6.1 Assume the below information to answer the following question(s). -Based on the Table 6.1, what is the last yield for this bond?

Which of the following affects the cost of a bond?

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

Nominal rate of interest is equal to ________.

What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.

A conversion feature in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have risen since the bond was issued.