Chapter 7 HW

Which of the following is FALSE regarding bonds? Long term bonds have greater interest rate risk than do short term bonds. A bond indenture describes the terms of the bond issue. Bonds represent ownership in the company. if interest rates in the market go up, the present value of existing bonds goes down. A bond issuer is legally required to make the interest payments and repay the par value at maturity. Previous Page Next Page Page 12 of 30

18. Which of the following statements are true?Statement I. An interest rate reflects the rate of return that a creditor receives when lending money, or the rate that a borrower pays when borrowing money. Interest rates change over time, so does the rate earned by creditors who provide loans or the rate paid by borrowers who obtain loans. Statement II. Interest rate movements have a direct influence on the market values of debt securities, such as money market securities, bonds, and mortgages. Statement III. Interest rate movements have an indirect influence on equity security values because they can affect the return by investors who invest in equity securities. Statement IV. Since interest rates have an influence on securities, participants in financial markets attempt to anticipate interest rate movements when restructuring their investment or loan positions.     a. I,II,III b. I,II,IV c. I,III,IV d. I,II,III,IV

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29. Which of the following statements are true? Statement I. An interest rate reflects the rate of return that a creditor receives when lending money, or the rate that a borrower pays when borrowing money. Interest rates change over time, so does the rate earned by creditors who provide loans or the rate paid by borrowers who obtain loans. Statement II. Interest rate movements have a direct influence on the market values of debt securities, such as money market securities, bonds, and mortgages. Statement III. Interest rate movements have an indirect influence on equity security values because they can affect the return by investors who invest in equity securities. Statement IV. Since interest rates have an influence on securities, participants in financial markets attempt to anticipate interest rate movements when restructuring their investment or loan positions.

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Bonds are a common long-term debt instrument. They are interesting because they are issued with a stated interest rate. Unlike the market interest rates, a bond's stated interest rate will never change. The stated interest rate is what will be paid to the investor over the bond's life. This means that the only way to manipulate the total amount earned or paid from bonds is by adjusting the selling price: What does it mean when a bond is issued at a premium or a discount? How does the issuance cost affect the investor's earnings from the bond purchases? How is the company's recognized interest expense affected? Reminder: Use specific examples to support your analysis.

2. When a company amortizes a premium, interest expense is: Group of answer choices cannot be determined greater than the cash payment for interest the same as the cash payment for interest less than the cash payment for interest       3. Which method of amortizing a discount will generate the same interest expense each year over the life of a bond? Group of answer choices Coupon amortization Market amortization Straight-line amortization Effective amortization       4. A bond has a face value of $100,000 and sold for $98,000.  How much of the discount will be amortized in the first year if the company uses straight-line amortization and the bond has a 10 year life? Group of answer choices $200 $2,000 $9,800 $10,000       5. A bond has a face value of $100,000 and sold for $98,000.  The stated interest rate is 5%.  The market interest rate is 6%.  The bond has a ten year life.  How much will interest expense be in the first year of the…

1.As a loan is paid off, the debt portion of the fixed payment increases debt and interest portions do not change each interest period monthly payment increases interest potion of the fixed payment increases 2.When a bond payable is measured using the fair value model, the interest expense is computed by multiplying the face value and nominal rate present value and effective rate face value and effective rate present value and nominal rate 3.Which is true when a bond payable is issued at a discount? Proceeds from issuance is lower than the face amount. The nominal rate is higher than the effective rate. The carrying amount of the bonds decreases each period. The interest paid is higher than the interest expense.

6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds.   True   False     The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 6.3315% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 10.1585%   7.9988%   6.799%   9.1186%     Recall that on a one-year Treasury security the yield is 4.6900% and 6.3315% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year…

Question-based on, "effective-interest method bond".   I have tried it but bonds are difficult.

1. If bonds are sold at a discount and the straight-line method of amortization is used, interest expense in earlier years will: (A) Exceed what is would have been had the effective interest rate method of amortization been used. (B) Be less than what it would have been had the effective interest rate method of amortization been used. (C) Be the same as it would have been had the effective interest rate method of amortization been used. (D) None of the above.

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Question 5 Suppose that discount bond prices are as follows: see picture a. A customer of your bank wants a forward contract to borrow $20M in three years from now for one year. What would be your quote to the customer? b. How would you confirm the rate? c. If customer accepts your offer, how would you lock-in the cash flows. Is there an arbitrage opportunity available? Show the entire cashflows chart.

6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates.   A. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now.   False   True     B. The yield on a one-year Treasury security is 5.8400%, and the two-year Treasury security has a 8.7600% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.)   14.936%   13.4071%   11.7606%   9.9965%     C. Recall that on a one-year Treasury security the yield is 5.8400% and 8.7600% on a two-year Treasury security. Suppose the one-year security does not have a…

Long-term bonds fluctuate more than short-term bonds as interest rates rise, making them a riskier investment. When interest rates rise, bond prices fall. A bond's coupon rate or interest rate determines the annual payment to the issuer. what does this mean?

Interest-rate risk results from:   a. Bond prices being fixed over the life of the bond b. Inflation being uncertain c. A mismatch between an individual's investment horizon and a bond's maturity d. The fact that most people hold bonds until they mature