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Exam 6: Interest Rates and Bond Valuation

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Question 21

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What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

A) call account
B) sinking fund
C) premium fund
D) registered account
E) bearer account

F) C) and D)
G) B) and E)

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Question 22

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A convertible bond has features of both debt and equity because:

A) the bond can be exchanged for shares
B) the bondholder is granted an equity position in the firm and receives interest income
C) the bond pays both interest and dividends
D) the bondholder can force the firm to redeem the bond at any time
E) the bondholders have voting rights

F) B) and D)
G) B) and E)

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Question 23

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When interest payments are made to whoever holds the bond,the bond is said to be in _____ form.

Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

The Fisher effect illustrates the relationship between:

A $1000 face value bond currently has a yield to maturity of 6.69 per cent.The bond matures in 3 years and pays interest annually.The coupon rate is 7 per cent.What is the current price of this bond?

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

The general purpose of protective covenants is to help protect:

A 7% Commonwealth Government bond has three years to maturity.Given that the bond pays interest semi-annually (i.e.twice a year) and an interest payment has just been made,what is the present value of the bond if the market interest rate is 9% and the face value of the bond is $100 000?

Investors of government bonds require an 8% per annum real return.The inflation rate (CPI) is 5.50%.What is the exact nominal rate?

What is the principal amount of a bond that is repaid at the end of the loan term called?

The interest rate risk premium is the compensation investors require for their assumption of the risk related to:

Aussie Investments Pty Ltd is an investor in the money market and regularly buys and sells bank-accepted bills.Today they are selling a bill that matures in 60 days.Sixty-day bills of a similar risk are priced at an interest rate of 6.00% per annum.What price can Aussie Investments expect to receive if the face value is $250 000?

When interest payments on a bond are made directly to the owner of record,the bond is said to be in _______ form.

An Australian Government 5.5%,$1000 bond matures in 7 years,pays interest semi-annually,and has a yield to maturity of 6.23 per cent.What is the current market price of the bond if a coupon payment has just been made?

Which party to a bill is the borrower?

Bondi Beachwear Pty Ltd takes out a short term loan through Witch Bank using a bill of exchange.The face value of the bill is $100 000 and it will mature in 90 days.If the interest rate quoted by the bank is 7.00% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar) ?

The price at which an investor can purchase a bond from a dealer is called the _____ price.

Which party to a bill of exchange is primarily responsible for the payment of the face value to the holder at maturity?

The government bond yield curve plots the yields on government bonds relative to the ____ of those securities.