Exam 6: Interest Rates and Bond Valuation

Longer the maturity, higher is the cost of a bond.

Risk-free rate of interest is equal to the sum of the real rate of interest plus an inflation premium.

When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________.

The yield curve in an economic period where higher future inflation is expected would be ________.

In a bond indenture, subordination is the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.

Valuation is the process that links risk and return to determine the worth of an asset.

A significant portion of the return on a zero coupon bond is in the form of ________.

The decision to refund a callable bond ________.

Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?

Convertible bonds are normally ________.

The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called ________.

What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?

The return expected from an asset is fully defined by its ________.

The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.

A company's bonds will experience more trading activity (in terms of the number of bonds traded on a given day) compared to its stock.

Which of the following explains the general shape of the yield curve of a bond?

Yield to call represents the rate of return that investors earn if they buy a callable bond at a specific price and hold it until it is called back and they receive the call price, which would be set above the bond's par value.

A ________ give bondholders the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time.

Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.