Chapter 2.1 the basic of bonds

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An investor owns a bond with a 3.5% nominal yield making semiannual interest payments. On each interest payable date, the investor can expect to receive how much

$17.50

A bond with a 3% stated yield and a $1,000 par value would pay how much in annual interest

$30

An investor has purchased a bond with a 5% coupon. This investor will receive

$50 annual interest until maturity

Which of the following best describes what 1 bond point equals

1% of $1,000

accrued interest on corporate bonds is calculated using

30 days in each month and 360 days in each year

each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of

4%

6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures

5% ($60/$1,200)

An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of

5.6%

a registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct

6% is the bond's coupon and 6.5% is the bond's yield to maturity

A bond has a 7% coupon and is currently offered at a price of 102, which of the following yields could be the yield to maturity for this bond?

6.55%

The current yield on a bond with a coupon rate of 7.5% currently selling at 105 1/2 is approximately

7.1%

A bond that is structured so that the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is

A balloon bond

Regarding different types of debt security maturities available to issuers, which of the following is accurate

A balloon maturity uses elements of both serial and term maturities

A bond that is structured so that the principal of the whole issue matures at once is

A term bond

Which of the following statements regarding bond interest is true?

Bond prices have an inverse relationship to interest rates

Par value for a bond is also known as

Face value or the amount a bond will be redeemed for at maturity

The relationship between fixed-income prices and prevailing interest rates is

Inverse

Which of the following are fixed at the time a bond is issued

Nominal yield

A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest

Nominal yield, current yield, yield to maturity, yield to call

When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?

Nothing; it does not change

Which of the following would be least likely to directly impact a bonds yield

Number of bonds in the issue

A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond

Serial

when an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond?

Serial

A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?

Term

Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true?

The bond's current yield equals $65/$1,100 or 5.9%

The coupon rate on a debt security represents

The interest rate the issuer has agreed to pay the investor

with a balloon maturity

The major portion of the principal debt is paid on the final maturity date

The city of Philadelphia issued $100 million in GO debt three years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client, who purchased one of these bonds on the initial offering, calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that

The nominal yield is higher than the yield to maturity

An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity,

The premium paid decreases the return

An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see

The price of the bond move higher

the coupon payable on a bond may also be referred to

The stated or nominal yield

a customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true

Yield to call is the same as yield to maturity

A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is

a bond

When selling a bond, the issuer is taking

a borrower's position

When purchasing a bond, the investor is taking on

a creditor position

An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at

a discount

A balloon maturity for an issuer's debt securities is most accurately described as

a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue

Assuming $1,000 par value, a bond priced at $1,200 is trading at

a premium

Interest is best described as

a specific rate of return the borrower pays the investor for use of the funds

Yield to call calculations reflect the early redemption date and

acceleration of the discount gain if the bond was originally purchased at a discount, and accelerated premium loss if the bond was originally purchased at a premium

A bond with a 4.5% stated yield might make

annual interest payments of $45 and semiannual interest payments of $22.50

Which of the following expressions describes the current yield of the bond?

annual interst (coupon) payment divided by current market price.

At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased

at a discount

When interest rates in the open market move up or down, a bond's coupon rate will

be unaffected by the open-market interest rates

the time to maturity for debt instruments

can be any length of time

A bond having a call feature

can be redeemed before maturity at the issuer's option

An issuer of bonds can be

corporate and both the federal and municipal governments

All of the following are names for the rate states on the face of the bond except

current yield

If a callable bond is priced at par, which of the following is true?

current yield equals yield to call

A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true?

current yield is higher than nominal yield, and nominal yield is lower than yield to maturity

Your customer holds a callable bond currently trading at $935. Which of the following is true

current yield is lower than yield to maturity

All of the following are corporate secured bonds except

debentures

For a corporate bond, once issued, nominal yield

does not change in response to interest rate movements

With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade

downward in price

A bond offered at par has a yield to maturity

equal to its current yield

An investor purchases a bond offered at par. The bond has a coupon rate

equal to its current yield

If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is

greater than 6.10

A customer buys a 4% treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity is

greater than nominal yield

An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity

increases

An investor holds a 4% bond, callable in 8 years, and maturing in 12 years. The bond's current yield measures its annual coupon payment relative to

its market price

An investor holds a 5% bond callable in six years and maturing in eight years. The bonds current yield measures its annual coupon payment relative to

its market price

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be

less than the coupon

Bonds can be issued with additional features attached, making them more attractive to investor. All of the following can be considered such features except

maturity

An investor lending money to an entity received back the principal amount of the loan on

maturity date

A stated coupon on a bond is its

nominal yield

the coupon on a bond can be described as

nominal yield

The coupon for a bond is calculated as a percentage of

par value, usually $1,000 for a bond

a serial bond is best described as

portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid

two benefits of owning preferred stock over common stock are

priority at liquidation and payment of dividends

A bond is trading at a price of $1,150 in the secondary market. If purchased at this price and held to maturity, this will

reduce the investors return

All of the following are types of maturities for debt instruments except

series

Which of the following would all be considered the same regarding yields on debt instruments

stated, nominal, and coupon yields

Bonds can typically be issued with

term, serial, or balloon maturities

A customer buys a 10% bond with a current yield of 12% and holds the bond until one year maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct

the bond was purchased at a discount and the bond was sold at a premium

A bond certificate represents

the borrower's obligation to repay the amount it borrowed plus interest

Which of the following statements is most accurate about feature benefits

the call feature benefits the issuer; the put feature benefits the investor

The market forces that typically drive the price of a bond trading in the secondary market would include all of the following except

the price of the issuer's stock

If a bond is trading at a premium, rank the following rates from low to high

yield to call, yield to maturity, current yield, nominal yield

for a callable bond priced at a discount

yield to maturity will be lower than the yield to call


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