Chapter 7 Finance

1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? A. coupon B. face value C. discount D. call premium E. yield

A. coupon

24. Real rates are defined as nominal rates that have been adjusted for which of the following? A. inflation B. default risk C. accrued interest D. interest rate risk E. both inflation and interest rate risk

A. inflation

44. Which one of the following bonds is the least sensitive to 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

B. 3-year; 6 percent coupon

39. Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. II, III, and IV only

C. II and IV only

40. Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount. B. The call price must equal the par value. C. An increase in market rates increases the market price of a bond. D. Decreasing the time to maturity increases the price of a discount bond, all else constant. E. Increasing the coupon rate decreases the current yield, all else constant.

D. Decreasing the time to maturity increases the price of a discount bond, all else constant.

32. The taxability risk premium compensates bond holders for which one of the following? A. yield decreases in response to market changes B. lack of coupon payments C. possibility of default D. a bond's unfavorable tax status E. decrease in a municipality's credit rating

D. a bond's unfavorable tax status

20. You want to buy a bond from a dealer. Which one of the following prices will you pay? A. call price B. auction price C. bid price D. asked price E. bid-ask spread

D. asked price

15. A deferred call provision is which one of the following? A. requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond B. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt C. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date E. requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond

D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

35. A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only

E. II and IV only

16. A call-protected bond is a bond that: A. is guaranteed to be called. B. can never be called. C. is currently being called. D. is callable at any time. E. cannot be called during a certain period of time.

E. cannot be called during a certain period of time.

10. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. note B. discounted C. zero-coupon D. callable E. debenture

E. debenture

31. Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? A. default risk B. taxability C. liquidity D. inflation E. interest rate risk

A. default risk

34. An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. a current yield that equals the coupon rate III. a yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value A. I and III only B. I and IV only C. II and III only D. II and IV only E. III and IV only

B. I and IV only

13. A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? A. zero coupon B. callable C. senior D. collateralized E. unsecured

B. callable

29. The interest rate risk premium is the: A. additional compensation paid to investors to offset rising prices. B. compensation investors demand for accepting interest rate risk. C. difference between the yield to maturity and the current yield. D. difference between the market interest rate and the coupon rate. E. difference between the coupon rate and the current yield.

B. compensation investors demand for accepting interest rate risk.

12. A sinking fund is managed by a trustee for which one of the following purposes? A. paying interest payments B. early bond redemption C. converting bonds into equity securities D. paying preferred dividends E. reducing coupon rates

B. early bond redemption

2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. coupon B. face value C. discount D. yield E. dirty price

B. face value

8. Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. at par. B. in registered form. C. in street form. D. as debentures. E. as callable.

B. in registered form.

45. As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. increases at an increasing rate. B. increases at a decreasing rate. C. increases at a constant rate. D. decreases at an increasing rate. E. decreases at a decreasing rate.

B. increases at a decreasing rate.

33. The liquidity premium is compensation to investors for: A. purchasing a bond in the secondary market. B. the lack of an active market wherein a bond can be sold for its actual value. C. acquiring a bond with an unfavorable tax status. D. redeeming a bond prior to maturity. E. purchasing a bond that has defaulted on its coupon payments.

B. the lack of an active market wherein a bond can be sold for its actual value.

43. Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate A. II only B. I and III only C. I and IV only D. II and III only E. II and IV only

C. I and IV only

41. Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060.

C. The bonds will sell at a premium if the market rate is 5.5 percent.

36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than

C. a discount; less than

9. A bond that is payable to whomever has physical possession of the bond is said to be in: A. new-issue condition. B. registered form. C. bearer form. D. debenture status. E. collateral status.

C. bearer form.

19. Which one of the following is the price a dealer will pay to purchase a bond? A. call price B. asked price C. bid price D. bid-ask spread E. par value

C. bid price

14. A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? A. dirty price B. redemption value C. call premium D. original-issue discount E. redemption discount

C. call premium

22. A bond is quoted at a price of $989. This price is referred to as which one of the following? A. call price B. face value C. clean price D. dirty price E. wholesale price

C. clean price

3. A bond's coupon rate is equal to the annual interest divided by which one of the following? A. call price B. current price C. face value D. clean price E. dirty price

C. face value

6. The current yield is defined as the annual interest on a bond divided by which one of the following? A. coupon B. face value C. market price D. call price E. dirty price

C. market price

4. The specified date on which the principal amount of a bond is payable is referred to as which one of the following? A. coupon date B. yield date C. maturity D. dirty date E. clean date

C. maturity

27. The pure time value of money is known as the: A. liquidity effect. B. Fisher effect. C. term structure of interest rates. D. inflation factor. E. interest rate factor.

C. term structure of interest rates.

11. Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years A. III 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

37. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price E. increase the time period

D. decrease the market price

23. Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the: A. quoted price. B. spread price. C. clean price. D. dirty price. E. call price.

D. dirty price.

42. A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: A. 3.5 percent. B. greater than 3.5 percent but less than 7 percent. C. 7 percent. D. greater than 7 percent. E. Answer cannot be determined from the information provided.

D. greater than 7 percent.

28. Which one of the following premiums is compensation for expected future inflation? A. default risk B. taxability C. liquidity D. inflation E. interest rate risk

D. inflation

26. The Fisher effect is defined as the relationship between which of the following variables? A. default risk premium, inflation risk premium, and real rates B. nominal rates, real rates, and interest rate risk premium C. interest rate risk premium, real rates, and default risk premium D. real rates, inflation rates, and nominal rates E. real rates, interest rate risk premium, and nominal rates

D. real rates, inflation rates, and nominal rates

5. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? A. coupon rate B. face rate C. call rate D. yield to maturity E. interest rate

D. yield to maturity

38. Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield A. I only B. I and III only C. I and IV only D. II and III only E. II and IV only

E. II and IV only

46. You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield-to-maturity is greater than 6 percent. B. The current yield is 6 percent. C. The next interest payment will be $30. D. The bond is currently valued at one-half of its issue price. E. You will realize a capital gain on the bond if you sell it today.

E. You will realize a capital gain on the bond if you sell it today.

30. A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. market rates B. comparable corporate bond rates C. the risk-free rate D. inflation E. maturity

E. maturity

25. Interest rates that include an inflation premium are referred to as: A. annual percentage rates. B. stripped rates. C. effective annual rates. D. real rates. E. nominal rates.

E. nominal rates.

17. The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the: A. trustee relationships. B. bylaws. C. legal bounds. D. "plain vanilla" conditions. E. protective covenants.

E. protective covenants.

21. The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. equilibrium. B. premium. C. discount. D. call price. E. spread.

E. spread.

7. An indenture is: A. another name for a bond's coupon. B. the written record of all the holders of a bond issue. C. a bond that is past its maturity date but has yet to be repaid. D. a bond that is secured by the inventory held by the bond's issuer. E. the legal agreement between the bond issuer and the bondholders.

E. the legal agreement between the bond issuer and the bondholders.

18. A bond that has only one payment, which occurs at maturity, defines which one of the following? A. debenture B. callable C. floating-rate D. junk E. zero coupon

E. zero coupon