Exercise

Answer True or false

1. 1. True or false. Nominal yield is different from coupon rate.
2. 2. True or false. A coupon rate of 4.5% means an annual coupon payment of $45.
3. 3. True or false. Bonds rated below BBB- are considered non-investment grade.

Answer the Following Questions

1. 4. The indenture includes all the following except:
2. A. The purpose of the bond issue and its features
3. B. The conditions under which the bonds may be redeemed before maturity
4. C. The procedures and remedies should the issuer default
5. D. Provisions that relieve the trustee from liability for negligence
6. 5. What piece(s) of information do you need to determine if a bond is a discount bond or a premium bond?
7. A. Par value
8. B. Market price
9. C. Nominal yield
10. D. Yield to maturity
11. E. Current interest rate
12. F. Investment grade
13. 6. For par bonds, what is the relationship between nominal yield and current yield?
14. 7. If the bid-ask spread of a corporate bond is 97 1/8 to 99 5/8, what is the spread in dollars?
15. 8. If a premium bond is quoted at 102 1/8, what is its market price?
16. 9. If a discount bond is quoted at 96.75, what is its market price?

Answers

1. 1. False. Nominal yield is the same as coupon rate and interest rate.
2. 2. True. 4.5% x $1,000 = 0.045 x $1,000 = $45.
3. 3. True. Bonds rated below BBB- are considered non-investment grade.
4. 4. D. There are no such provisions that relieve the trustee from liability for negligence; such provisions are prohibited by the Trust Indenture Act.
5. 5. A and B. A bond that sells below its par value is a discount bond and a bond that sells above its par value is a premium bond. You may be able to assume a bond is a discount or premium bond from its nominal yield and current interest rate, but the relationship of sales price to par value is the defining factor.
6. 6. For par bonds, nominal yi