# FIN401 Exam 2 (Chapter 7)

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coupon
The stated interest payment, in dollars, made on a bond each period is called the bond's:
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face value
The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
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decreases; decreases.
All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____
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\$1,000; \$35 : Because the bond is selling at par, its price is equal to the face value of \$1,000. Since the bond pays coupon seminually, coupon = \$1,000 * 7% / 2 = \$35
A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.
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greater than 6 percent but less than 7 percent
The newly issued bonds of the Wynslow Corp. offer a 6 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:
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a discount; higher than
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
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current yield
The annual coupon payment of a bond divided by its market price is called the:
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to realize a capital loss if you sold the bond at the market price today.
You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:
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I, III, and IV only
American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct? I. The initial selling price of each bond will be \$1,000. II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond. III. Each interest payment per bond will be \$40. IV. The yield to maturity when the bonds are first issued is 8 percent.
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yield to maturity
The rate of return required by investors in the market for owning a bond is called the:
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Par value (face value)
The principle amount of a bond that is repaid at the maturity of the bond
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coupon rate
annual interest payment as a percentage of face value
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coupon
the interest payments paid to the bondholder
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Present value decreases
As interest rates increase
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Bond prices decrease
As interest rates increase
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YTM=coupon rate
par value=bond price
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YTM> coupon rate
par value is less than the bond price, selling at a discount
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YTM< coupon rate
par value is greater than the bond price, selling at a premium
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Experience more Price risk
Long-term bonds with low coupon rates
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Experience more reinvestment rate risk