Fin 301 Chapter 8 Bond Valuation and the Structure of Interest Rates Exam Questions with Latest Update
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Course
FIN301
Institution
FIN301
The market price of a bond - Answer-The present value of the promised cash flows (interest and principal payments) discounted at the current market rate of interest for bonds of similar risk.
Market for corporate bonds - ENORMOUS - Answer-most important investors in corporate bonds are big insti...
Fin 301 Chapter 8 Bond Valuation and
the Structure of Interest Rates Exam
Questions with Latest Update
The market price of a bond - Answer-The present value of the promised cash flows
(interest and principal payments) discounted at the current market rate of interest for
bonds of similar risk.
Market for corporate bonds - ENORMOUS - Answer-most important investors in
corporate bonds are big institutional investors such as life insurance companies,
pension funds, and mutual funds.
Secondary market transactions - Answer-take place through dealers in over-the-counter
market OTC.
The term: Thin on Wall Street - Answer-means that secondary market trades of
individual securities are relatively infrequent.
Corporate bonds are less marketable than the securities that have higher daily trading
volumes
Bond Price: Transparency - Answer-Easy to view prices and trading volume.
EX: NYSE
Info on individual corporate bond transactions are not widely published as the
transactions occur.
this is why the corporate bond market is not as efficient as the stock or money markets.
fixed income securities - Answer-debt instruments that pay interest in amounts that are
fixed for the life of the contract
paid to investors
Vanilla bonds - Answer-The most common bonds issued by corporations have coupon
payments that are fixed for the life of the bond, and at maturity the entire original
principal is paid and the bonds are retired.
Coupon Payments: - Answer-the interest payments made to bondholders
Annually or Semiannually
payment amount remains fixed for the life of the bond contract
, Face Value aka Par Value - Answer-for most corporate bonds are 1,000
Coupon Rate - Answer-Annual coupon payment DIVIDED by the bonds face vale
COUPON RATE FORMULA = C / F
ex: Our vanilla bond pays $80 of coupon interest annually and has a face value of 1,000
$80/$1000 = 8%
Zero Coupon Bonds - Answer-Promise a single payment at maturity, these have no
coupon payments
Firms that are expanding operations but have little cash available to make interest
payments are especially likely to use zero coupon bonds for funding.
Convertible Bonds - Answer-Can be converted into shares of common stock at some
predetermined ratio at the discretion of the bondholder
ex: $1,000 face value bond may be convertible into 100 shares of common stock.
Bond Valuation - Answer-Value/price of any asset is the present value of its future cash
flows.
Steps to Value an Asset - Answer-1. Estimate the expected future cash flows.
2. Determine the required rate of return, or discount rate. This rate depends on the
riskiness of the future cash flows.
3. Compute the present value of the future cash flows. This present value is what the
asset is worth at a particular point in time.
The cash flows (coupon and principal payments) - Answer-CONTRACTUAL obligations
known by participants, because its stated in the bond contract
Yield to Maturity aka YIELD - Answer-required rate of return,
discount rate,
for a bond is the market interest rate
Required Rate of Return - Answer-The opportunity cost for investors who purchase the
bond
(demand as a minimum rate of return on their investment)
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