You predict that interest rates are about to fall. Which bond will give you the highest capital gain?
a. High coupon, long maturity
b. High coupon, short maturity
c. Zero coupon, long maturity
d. Low coupon, long maturity
c. Zero coupon, long maturity
Is the decrease in a bond's price corresponding to an increase in its yield to maturity more or less than the price increase resulting from a decrease in yield of equal magnitude?
a. The increase will be larger than the decrease in price.
b. The increase
a. The increase will be larger than the decrease in price.
The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.
a. nominal yield
b. current yield
c. yield to maturity
d. yield to call
b. current yield
Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.
a. higher
b. lower
c. the same
d. indeterminate
a. higher
Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.
a. marketability
b, risk
c. taxation
d. call protection
c. taxation
Sinking funds are commonly viewed as protecting the _______ of the bond.
a. issuer
b. underwriter
c. holder
d. dealer
c. holder
The invoice price of a bond is the ______.
a. stated or flat price in a quote sheet plus accrued interest
b. stated or flat price in a quote sheet minus accrued interest
c. bid price
d. average of the bid and ask price
a. stated or flat price in a quote sheet plus accrued interest
Two bonds have identical times to maturity and coupon rates. One is callable at 105, the other at 110. Which should have the higher yield to maturity?
a. The bond callable at 105, should have the higher yield to maturity.
b. The bond callable at 110, shou
a. The bond callable at 105, should have the higher yield to maturity.
Which type of risk is based on the financial integrity of a bond issuer?
A) liquidity risk
B) call risk
C) default risk
D) interest rate risk
C) default risk
Under normal economic conditions, the major source of risk faced by investors who purchase investment grade bonds is
A) purchasing power risk.
B) interest rate risk.
C) liquidity risk. D) default risk.
B) interest rate risk.
Which of the following statements concerning equipment trust certificates are correct?
I. Equipment trust certificates are typically used to raise funds for purchasing airplanes and railroad engines.
II. Equipment trust certificates are usually issued wit
A) I and IV only
If you expect market interest rates to rise, you should purchase?
A) short term, low coupon bonds.
B) short term, high coupon bonds.
C) long term, low coupon bonds.
D) long term, high coupon bonds.
B) short term, high coupon bonds.
When the market rate of return (YTM) exceeds the coupon rate, a bond will sell at
A) par.
B) face value.
C) a premium.
D) a discount.
D) a discount.
Which one of the following combination of features causes bond prices to be the most volatile?
A) low coupon, short maturity
B) high coupon, short maturity
C) low coupon, long maturity
D) high coupon, long maturity
C) low coupon, long maturity
Which one of the following bonds has the greatest interest rate risk?
a. 3-year; 4 percent coupon
b. 3-year; 6 percent coupon
c. 5-year; 6 percent coupon
d. 7-year; 6 percent coupon
E. 7-year; 4 percent coupon
E. 7-year; 4 percent coupon
Callable bonds are issued with higher coupons and promised yields to maturity to compensate bondholders for possibility of bond being called.
In an era of particularly low interest rates, which of the following bonds is most likely to be called?
A. Zero c
C. Coupon bonds selling at a premium
The rate of return required by investors in the market for owning a bond is called the:
a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
e. coupon rate.
d. yield to maturity.
The annual coupon divided by the face value of a bond is called the:
a. coupon.
b. face value.
c. maturity.
d. yield to maturity.
e. coupon rate.
e. coupon rate.
An indenture is:
a. the annual amount which a bond issuer agrees to pay as interest on the debt.
b. the written record of the original and all subsequent holders of each individual bond comprising a debt issue.
c. a bond which is past its maturity date bu
e. the written agreement between the bond issuer and the bondholders which details the terms of the debt issue.
An account managed by a bond trustee for early bond redemption payments is called a:
a. sinking fund.
b. collateral payment account.
c. deed in trust account.
d. call provision account.
e. conversion fund.
a. sinking fund.
A bond that makes no coupon payments and is initially sold at a deep discount is called a _____ bond.
a. debenture
b. callable
c. floating-rate
d. junk
e. zero coupon
e. zero coupon
The price a dealer is willing to pay for a security is called the:
a. equilibrium price.
b. asked price.
c. bid price.
d. bid-ask spread.
e. auction price.
c. bid price.
The price at which a dealer is willing to sell a security is called the:
a. equilibrium price.
b. auction price.
c. bid price.
d. asked price.
e. bid-ask spread.
d. asked price.
Interest rate risk increases as the:
I. time to maturity decreases.
II. time to maturity increases.
III. coupon rate decreases.
IV. coupon rate increases.
a. II only
b. I and III only
c. I and IV only
d. II and III only
e. II and IV only
d. II and III only
Municipal bonds can be either general obligation bonds or revenue bonds. Of these two types of municipal bonds, only general obligation bonds
A) are specifically serviced by the income generated from particular projects.
B) are backed by the full faith an
B) are backed by the full faith and credit of the issuer.
When convertible bonds are first issued
I. the conversion price of the stock is higher than the market price.
II. the market price of the stock is higher than the conversion price.
III. the coupon rate is higher than if the bond were not convertible.
IV.
C) I and IV only
Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price. The stock does not pay a dividend.
A) The bondholders will immediately convert their bonds to stock.
B) The issuing co
C) The issuing company will call the bonds and bondholders will convert them to common shares.
Which of the following is a good reason to invest in convertible bonds?
A) They often have higher than normal coupon rates.
B) They offer protection against rising interest rates.
C) They tend to be issued by stable, low-risk companies.
D) They offer pred
D) They offer predictable income and a chance to profit from an increase in the stock price.
The coupon rate on convertible bonds is usually higher than the coupon rate on equivalent bonds that are not convertible. T/F?
False
The conversion ratio denotes the number of shares for which a convertible bond can be exchanged. T/F?
True
Debentures are secured by
A) the issuer's good name.
B) earnings from the project the debentures were issued to finance.
C) financial assets held in trust by a third party.
D) physical assets like real estate.
A) the issuer's good name.
Under which bond provision is the issuer required to retire portions of the bond issue prior to maturity?
A) call feature
B) refunding provision
C) subordination clause
D) sinking fund feature
D) sinking fund feature
Lee is considering buying one of two newly-issued bonds. Bond A is a twenty-year, 7.5% coupon bond that is non-callable. Bond B is a twenty-year, 8.25% bond that is callable after two years. Both bonds are comparable in all other aspects. Lee plans on hol
A) purchase Bond A
Bonds are least likely to be called if
A) they are selling at a substantial premium.
B) they are selling at a substantial discount.
C) the price is close to par value.
D) if they do not mature for at least 5 years.
B) they are selling at a substantial discount.
Municipal bonds can be either general obligation bonds or revenue bonds. Of these two types of municipal bonds, only general obligation bonds
A) are specifically serviced by the income generated from particular projects.
B) are backed by the full faith an
B) are backed by the full faith and credit of the issuer.
Treasury strip bonds are popular because
I. they are high-quality bonds.
II. they have a wide range of maturities.
III. they are very liquid.
IV. their income is not taxed until the bonds mature.
A) I and III only
B) I, II and III only
C) I, II and IV onl
B) I, II and III only
One of the major problems associated with mortgage-backed securities is that
A) the principal portion of each payment is considered taxable income.
B) they are refundable. C) they are self-liquidating.
D) they are serial issues.
C) they are self-liquidating.
Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes.
a) longer; higher
b) longer; lower
c) shorter; higher
d) shorter; lower
b) longer; lower
A coupon bond that pays interest semiannually has a par value of $1000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be:
a)$1000
b)$1062.81
c)$1081.82
d)$1100.03
b)$1062.81
You can be sure that a bond will sell at a premium to par when _________.
a) its coupon rate is greater than its YTM
b) its coupon rate is less than its YTM
c) its coupon rate is equal to its YTM
d) its coupon rate is less than its conversion value
a) its coupon rate is greater than its YTM
Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1000, and a required return of 12% would be priced at ________.
a) $97.22
b) $104.49
c) $364.08
d) $732.14
a) $97.22
If the volatility of interest rates is expected to increase, then Joe Hill should _______.
a) prefer the Wildwood bond to the Asbury bond
b) prefer the Asbury bond to the Wildwood bond
c) be indifferent between the Wildwood bond and Asbury bond
d) The ans
b) prefer the Asbury bond to the Wildwood bond
A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's YTC?
a) 6.72%
b) 9.17%
c) 4.49%
d) 8.98%
d) 8.98%
An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?
a) 4.8%
b) 4.85%
c) 9.6%
d) 9.7%
b) 4.85%
If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely YTM on the bond?
a) 4.3%
b) 4.5%
c) 5.2%
d) 5.5%
a) 4.3%
If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the YTM remains stable over time)
a) capital gain; c
c) capital loss; capital gain
To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio
a) I only
b) II and III only
c) I and III only
d) I, II, and III
b) II and III only
Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?
a) callable features
b) convertible feature
c) subordination clause
d) sinking fund
d) sinking fund
In an era of particularly low interest rates, which of the following bonds is most likely to be called?
a) zero-coupon bonds
b) coupon bonds selling at a discount
c) coupon bonds selling at a premium
d) floating-rate bonds
c) coupon bonds selling at a premium