Exam 7: Interest Rates and Bond Valuation

Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of inflation is expected to be 3% for the coming year. Considering only an inflation premium, construct an example showing how an expected increase in the rate of inflation leads to an upward sloping term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect your results.

Investment-quality bond ratings as granted by Standard & Poor's include bonds rated as _____ and higher.

The rate that is computed by dividing the annual interest payment by the face value of a bond is called the:

A call provision, unlike a sinking fund, allows a company to retire its debt early for a specified price.

What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value

Zane Industrial Products wants to raise $22 million to expand their business. To accomplish this, they plan to sell 30-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 7.25%. What is the approximate minimum number of bonds the company must sell to raise the money they need (use values in the dollar)?

The Jaxson Company offers a 6% coupon bond with semi-annual payments and a yield to maturity of 7.27%. The bonds mature in 6 years. What is the market price of a $1,000 face value bond?

In addition to interest rate risk and the real rate, what other factors can bond yields be affected by?

Which of the following provisions would NOT be listed in the bond indenture?

Provide four components likely to be included in bond indenture.

The rate of return on a bond which reflects the increase in buying power achieved by the bond holder is called the _____ rate of return.

What is the market value of a bond that will pay a total of 40 semi-annual coupons of $50 each over the remainder of its life? Assume the bond has a $1,000 face value and an 8% yield to maturity.

A(n) ____________ bond is often putable and has a "collar".

Provide an appropriate definition of Fisher effect.

The call provision found on most publicly issued bonds are advantageous to the ______ because _____________________.

The Windjammer Co. bonds are currently selling for $1,003.17. These bonds mature in three years, pay interest annually, and have a yield-to-maturity of 6.63%. What is the coupon rate?

Provide an appropriate definition of registered form.

Increasing the coupon rate and decreasing the time to maturity will increase the interest rate risk of a bond.

A bond that pays no separate interest payments is called a(n):

The term structure of interest rates may be downward sloping if: