Chap 7 part 1

28. Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ______ as a result. A) rise B) decline C) be zero D) be unaffected

b

32. ______ are not primary purchasers of bonds. A) Insurance companies B) Finance companies C) Mutual funds D) Pension funds

b

8. __________ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. A) Competitive B) Noncompetitive C) Negotiable D) Non-negotiable

a

13. Municipal general obligation bonds are ______. Municipal revenue bonds are ______. A) supported by the municipal government's ability to tax; supported by the municipal government's ability to tax B) supported by the municipal government's ability to tax; supported by revenue generated from the project C) always subject to federal taxes; always exempt from state and local taxes D) typically zero coupon bonds; typically zero¬ coupon bonds

b

1. ___________ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments. A) Bearer B) Registered C) Treasury D) Corporate

a

12. Bonds issued by ________________ are backed by the federal government. A) the Treasury B) AAA-rated corporations C) state governments D) city governments

a

17. Corporate bonds that receive a _________ rating from credit rating agencies are normally placed at _______ yields. A) higher; lower B) lower; lower C) higher; higher D) none of the above

a

22. When would a firm most likely call bonds? A) after interest rates have declined B) if interest rates do not change C) after interest rates increase D) just before the time at which interest rates are expected to decline

a

26. Bonds that are secured by personal property are called A) chattel mortgage bonds. B) first mortgage bonds. C) second mortgage bonds. D) debentures.

a

3. Note maturities are usually ______, while bond maturities are ______. A) less than 10 years; 10 years or more B) 10 years or more; less than 10 years C) less than 5 years; 5 years or more D) 5 years or more; less than 5 years

a

30. _____ bonds have the most active secondary market. A) Treasury B) Zero-coupon corporate C) Junk D) Municipal

a

41. If interest rates suddenly ____________, those existing bonds that have a call feature are __________ likely to be called. A) decline; more B) decline; less C) increase; more D) none of the above

a

34. When firms issue __________, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index. A) auction-rate securities B) structured notes C) leveraged notes D) stripped securities

b

35. Which of the following statements is true regarding STRIPS? A) they are issued by the Treasury B) they are created and sold by various financial institutions C) they are not backed by the U.S. government D) they have to be held until maturity E) all of the above are true regarding STRIPS

b

4. Investors in Treasury notes and bonds receive _______ interest payments from the Treasury. A) annual B) semiannual C) quarterly D) monthly

b

40. Which of the following is not true regarding the call provision? A) It typically requires a firm to pay a price above par value when it calls its bonds. B) The difference between the market value of the bond and the par value is called the call premium. C) A principal use of the call provision is to lower future interest payments. D) A principal use of the call provision is to retire bonds as required by a sinking-fund provision. E) A call provision is normally viewed as a disadvantage to bondholders.

b

5. Since 2001, the Treasury has relied heavily on _____-year bonds to finance the U.S. budget deficit. A) 50 B) 2 C) 10 D) 5

c

6. Interest earned from Treasury bonds is A) exempt from all income tax. B) exempt from federal income tax. C) exempt from state and local taxes. D) subject to all income taxes.

c

14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ________. A) remain unchanged B) fall C) rise D) none of the above

c

19. Which of the following institutions is most likely to purchase a private bond placement? A) commercial bank B) mutual fund C) insurance company D) savings institution

c

20. A protective covenant may A) specify all the rights and obligations of the issuing firm and the bondholders. B) require the firm to retire a certain amount of the bond issue each year. C) restrict the amount of additional debt the firm can issue. D) none of the above

c

23. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in A) dollars. B) euros and making payments from U.S. headquarters. C) euros and making payments from its German subsidiary. D) dollars and making payments from its German subsidiary.

c

25. Bonds that are not secured by specific property are called A) a chattel mortgage. B) open end mortgage bonds. C) debentures. D) blanket mortgage bonds.

c

27. The coupon rate of most variable-rate bonds is tied to A) the prime rate. B) the discount rate. C) LIBOR. D) the federal funds rate.

c

31. Some bonds are "stripped," which means that A) they have defaulted. B) the call provision has been eliminated. C) they are transferred into principal-only and interest-only securities. D) their maturities have been reduced.

c

33. Leveraged buyouts are commonly financed by the issuance of:: A) AAA-rated bonds. B) Treasury bonds. C) junk bonds. D) municipal bonds.

c

9. Treasury bond dealers A) quote an ask price for customers who want to sell existing Treasury bonds to the dealers. B) profit from a very wide spread between bid and ask prices in the Treasury securities market. C) may trade Treasury bonds among themselves. D) make a primary market for Treasury bonds.

c

15. The municipal yield curve is typically _________ than the Treasury yield curve, and the shape of the municipal yield curve is __________ the shape of the Treasury yield curve. A) lower; similar to B) higher; much different than C) lower; much different than D) higher; similar to

d

21. A call provision normally A) allows the firm to call bonds at par value. B) gives the firm the option to call bonds at market value. C) allows the firm to call bonds at a price below par value. D) requires the firm to call bonds at a price above par value.

d

39. Which of the following is not true regarding zero-coupon bonds? A) They are issued at a deep discount from par value. B) Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. C) The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. D) Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts. E) all of the above are true

e