Ch.10

8) Inflation-indexed Treasury securities are commonly called ________. A) PIKs B) CARs C) TIPS D) STRIPS

STRIPS

56) Which of the following bonds would most likely sell at the lowest yield? A) a callable debenture B) a puttable mortgage bond C) a callable mortgage bond D) a puttable debenture

a puttable mortgage bond

22) Bonds rated ________ or better by Standard & Poor's are considered investment grade. A) AA B) BBB C) BB D) CCC

BBB

6) 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 yield to maturity remains stable over time.) A) capital gain; capital loss B) capital gain; capital gain C) capital loss; capital gain

capital loss, capital gain

35) Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future. A) increase B) decrease C) not change D) change in an unpredictable manner

decrease

90) A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A) increased B) decreased C) stayed the same D) The answer cannot be determined from the information given.

decreased

19) Bonds issued in the currency of the issuer's country but sold in other national markets are called ________. A) Eurobonds B) Yankee bonds C) Samurai bonds D) foreign bonds

eurobonds

63) Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________. A) expected increases in inflation over time B) expected decreases in inflation over time C) the presence of a liquidity premium D) that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

expected increases in inflation over time

62) 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

higher

49) Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ________. A) multiyear analysis B) horizon analysis C) maturity analysis D) reinvestment analysis

horizon analysis

67) A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A) I and II only B) I and III only C) II and III only D) I, II, and III

1 and 11 only

64) The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A) I only B) II only C) I and II only D) I, II, and III

1, 11, and 111

57) A 1% decline in yield will have the least effect on the price of a bond with a ________. A) 10-year maturity, selling at 80 B) 10-year maturity, selling at 100 C) 20-year maturity, selling at 80 D) 20-year maturity, selling at 100

10-year maturity, selling at 100

14) 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

11 and 111 only

95) What is the lowest grade a bond can receive and still be considered investment grade? A) AAA B) A C) BBB D) BB

BBB

96) Which country experienced the largest-ever sovereign default in 2012? A) Germany B) Ireland C) Greece D) Portugal

Greece

16) ________ are examples of synthetically created zero-coupon bonds. A) COLTS B) OPOSSMS C) STRIPS D) ARMs

STRIPS

23) Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________. A) a higher yield on short-term bonds than on long-term bonds B) a higher yield on long-term bonds than on short-term bonds C) the same yield on both short-term bonds and long-term bonds D) none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

a higher yield on long-term bonds than on short-term bonds

28) The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A) an asset-backed B) a TIPS C) a catastrophe D) a pay-in-kind

a pay-in-kind

13) You would typically find all but which one of the following in a bond contract? A) a dividend restriction clause B) a sinking fund clause C) a requirement to subordinate any new debt issued D) a price-earnings ratio

a price-earnings ratio

15) According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________. A) declining liquidity premiums B) an expectation of an upcoming recession C) a decline in future inflation expectations D) an increase in expected interest rate volatility

an increase in expected interest rate volatility

24) Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________. A) both bonds will increase in value but bond A will increase more than bond B B) both bonds will increase in value but bond B will increase more than bond A C) both bonds will decrease in value but bond A will decrease more than bond B D) both bonds will decrease in value but bond B will decrease more than bond A

both bonds will decrease in value but bond B will decrease more than bond A

31) A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A) callable B) coupon C) puttable D) Treasury

callable

27) ________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A) Asset-backed bonds B) TIPS C) Catastrophe D) Pay-in-kind

catastrophe

34) 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

coupon bonds selling at a premium

7) Floating-rate bonds have a ________ that is adjusted with current market interest rates. A) maturity date B) coupon payment date C) coupon rate D) dividend yield

coupon rate

92) Which of the following rates represents a bond's annual interest payment per dollar of par value? A) holding period return B) coupon rate C) IRR D) YTM

coupon rate

2) Sinking funds are commonly viewed as protecting the ________ of the bond. A) issuer B) underwriter C) holder D) dealer

holder

12) TIPS offer investors inflation protection by ________ by the inflation rate each year. A) increasing only the coupon rate B) increasing only the par value C) increasing both the par value and the coupon payment D) increasing the promised yield to maturity

increasing both the par value and the coupon payment

91) The ________ is the document that defines the contract between the bond issuer and the bondholder. A) indenture B) covenant agreement C) trustee agreement D) collateral statement

indenture

18) TIPS are an example of ________. A) Eurobonds B) convertible bonds C) indexed bonds D) catastrophe bonds

indexed bonds

93) Which type of risk is most significant for bonds? A) maturity risk B) default risk C) interest rate risk D) reinvestment rate risk

interest rate risk

26) Bonds with coupon rates that fall when the general level of interest rates rise are called ________. A) asset-backed bonds B) convertible bonds C) inverse floaters D) index bonds

inverse floaters

30) Which one of the following statements is correct? A) invoice price = flat price - accrued interest B) invoice price = flat price + accrued interest C) flat price = invoice price + accrued interest D) invoice price = settlement price - accrued interest

invoice price = flat price + accrued interest

60) You can be sure that a bond will sell at a premium to par when ________. A) its coupon rate is greater than its yield to maturity B) its coupon rate is less than its yield to maturity C) its coupon rate is equal to its yield to maturity D) its coupon rate is less than its conversion value

its coupon rate is greater than its yield to maturity

21) The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________. A) high grade B) intermediate grade C) investment grade D) junk bonds

junk bonds

29) 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

longer; lower

47) Yields on municipal bonds are typically ________ yields on corporate bonds of similar risk and time to maturity. A) lower than B) slightly higher than C) identical to D) twice as high as

lower than

11) The primary difference between Treasury notes and bonds is ________. A) maturity at issue B) default risk C) coupon rate D) tax status

maturity at issue

94) Which of the following yield curves generally implies a normal healthy economy? A) positive slope B) negative slope C) flat D) hump-shaped curve

positive slope

If interest rates are expected to rise, 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 the Asbury bond D) The answer cannot be determined from the information given.

prefer the asbury bond to the wildwood bond

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 the Asbury bond D) The answer cannot be determined from the information given.

prefer the asbury bond to the wildwood bond

25) You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A) mortgage bonds B) senior debentures C) preferred stock D) equipment obligation bonds

preferred stock

17) A ________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A) callable B) coupon C) puttable D) Treasury

puttable

3) A collateral trust bond is ________. A) secured by other securities held by the firm B) secured by equipment owned by the firm C) secured by property owned by the firm D) unsecured

secured by other securities held by the firm

4) A mortgage bond is ________. A) secured by other securities held by the firm B) secured by equipment owned by the firm C) secured by property owned by the firm D) unsecured

secured by property owned by the firm

9) In regard to bonds, convexity relates to the ________. A) shape of the bond price curve with respect to interest rates B) shape of the yield curve with respect to maturity C) slope of the yield curve with respect to liquidity premiums D) size of the bid-ask spread

shape of the bond price curve with respect to interest rates

32) 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 feature B) convertible feature C) subordination clause D) sinking fund

sinking fund

33) Serial bonds are associated with ________. A) staggered maturity dates B) collateral C) coupon payment dates D) conversion features

staggered maturity dates

1) 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

stated or flat price in a quote sheet plus accrued interest

65) 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

taxation

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ________. A) the price of the Wildwood bond would decline by more than the price of the Asbury bond B) the price of the Wildwood bond would decline by less than the price of the Asbury bond C) the price of the Wildwood bond would increase by more than the price of the Asbury bond D) the price of the Wildwood bond would increase by less than the price of the Asbury bond

the price of the wildwood bond would increase by more than the price of the asbury bond

10) A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A) Both bonds are examples of Eurobonds. B) The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C) The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D) Neither bond is a Eurobond.

the us bond is a eurobond, and the japanese bond is termed a foreign bond

5) A debenture is ________. A) secured by other securities held by the firm B) secured by equipment owned by the firm C) secured by property owned by the firm D) unsecured

unsecured