Exercise

Answer true or false.

1. 1. _____ Nominal yield is different from coupon rate.
2. 2. _____ A coupon rate of 4.5% means an annual coupon payment of $45.
3. 3. _____ 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. Which of the following piece(s) of information would allow you to determine if a bond is a discount bond or a premium bond? (Choose more than one.)

Par value

Market price

Nominal yield

Investment grade

1. 6. For par bonds, what is the relationship between nominal yield and current yield?
2. 7. If the bid-ask spread of a corporate bond is 97 1/8 – 99 5/8, what is the spread in dollars?
3. 8. If a premium bond is quoted at 102 1/8, what is its market price?
4. 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. Par value, market price. 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.
6. 6. They are equal. For par bonds, nominal yield and current yield are equa