Question: Bonds issued by state and local governments are called __ ___

Answer: municipal bonds

Question: What is a real rate of return?

Answer: It is a rate return that has been adjusted to remove inflation

It is a percentage change in buying power

An inflation rate measures changes in buying power

Question: Which of the following terms apply to a bond?

Answer: Par value

Coupon rate

Time to maturity

Question: The model that correctly specifies the relationship between the nominal rate and the real rate is:

R = the nominal rate

r = the real rate

Answer: (1 + R ) = (1 + r) x (1+h)

Question: What is a corporate bond’s yield to maturity (YTM)?

Answer: YTM is the expected return for an investor who buys the bond today and holds it to maturity

YTM is the prevailing market interest rate for bonds with similar features

Question: What does historical data suggest about the nature of short-term and long term interest rates?

Answer: Sometimes short term rates are higher and sometimes long term rate are higher

Question: As an investor in the bond market, why should you be concerned about changes in interest rates?

Answer: Changes in interest rates cause changes in bond prices

Question: The sensitivity of a bonds price to interest rate changes in dependent on which of the following two variables?

Answer: Time maturity

Coupon rate

Question: Which of the following are true of bonds?

Answer: They are interest only loans

They are issued by both corporations and governments

They are the major form of corporate debt

Question: ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

Answer: $60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years