FI 302 Exam 2 CHAPTER 7

__________ 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

___________ 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

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

Bonds issued by __________ are backed by the federal government. a. the treasury b. AAA-rated corporations c. state governments d. city governments

a

Bonds that are secured by personal property are called a. chattel mortgage bonds b. first mortgage bonds c. second mortgage bonds d. debentures

a

Corporate bonds that receive a _________ rating from rating agencies are normally placed at ________ yields. a. higher; lower b. lower; lower c. higher; higher d. none of the above

a

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa

a

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

When purchasing bonds, individual investors use a ______ to specify the maximum price they are willing to pay for a bond a. limit order b. market order c. stop order d. price order

a

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

Which of the following eurozone countries has not recently experienced debt repayment problems? a. finland b. greece c. portugal d. spain

a

_________ bonds have the most active secondary market a. treasury b. zero-coupon corporate c. junk d. municipal

a

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

Which of the following statements is not true regarding STRIPS? a. they are not issued by the treasury b. they are created and sold by various financial institutions c. they are backed by the US gov d. they have to be held until maturity e. all of the above are true

D

A credit rating agency is paid by: a. the purchasers of the bonds that the agency rates b. the issuers of the bonds the the agency rates c. the taxpayers d. the New York stock exchange

b

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____. a. 250 b. 255 c. 500 d. 510

b

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

Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9 c. 10.5 d. none of the above

b

If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ______ debt and ______ equity, which implies a ______ degree of financial leverage. a. more; less; lower b. more; less; higher c. less; more; higher d. none of teh above

b

Investors in Treasury notes and bonds receive _______ interest payments from the Treasury. a. annual b. semiannual c. quarterly d. monthly

b

Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9 c. 10.5 d. more info is needed

b

Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent. a. 9.33 b. 7.84 c. 9 d. none of the above

b

Municipal general obligation bonds are _____. Municipal revenue bonds are _________. a. supported by the municipal government's ability to tax; supported by the municpal 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

Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9% annual coupon rate for $1,100. Paul's yield to maturity is ______ percent a. 9.33 b. 7.84 c. 9 d. none of the abov

b

The financial reform act of 2010 established the _________ to provide oversight for credit rating agencies a. federal ratings bureau b. office of credit ratings c. office of agency supervision d. ratings oversight commission

b

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

Which of the following statements is incorrect? a. the municipal bond must pay a risk premium to compensate for the possibility of default risk b. the treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds c. the income earned from municipal bonds is exempt from federal taxes d. all of the above are true

b

Which of the following statements is not true regarding zero-coupon bonds? a. they are issued at a deep discount from par value b. Investors are taxed on the total amount of interest earned at 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 until maturity d. zero-coupon bonds are purchased mainly for tax exempt investment accounts, such as pension funds and individual accounts

b

___________ are not primary purchasers of bonds a. insurance companies b. finance companies c. mutual funds d. pension funds

b

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

b

A _________ has first claim on specified assets, while a ________ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures a. first mortgage bond; second mortgage bond b. first mortgage bond; debenture c. first mortgage bond; subordinated debenture d. chattel mortgage bond; subordinated debenture

c

A private 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

A variable rate bond allows a. investors to benefit from declining rates over time b. issuers to benefit from rising market interest rates over time c. investors to benefit from rising market interest rates over time d. none of the above

c

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 US headquarters c. euros and making payments from its German subsidiary d. dollars and making payments from its German subsidiary

c

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

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

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

Leverage buyouts are commonly financed by the issuance of a. money market securities b. treasury bonds c. corporate bonds d. municipal bonds

c

The Treasury has relied heavily on __________-year bonds to finance the US budget deficit. a. 50 b. 70 c. 10 d. 5

c

The issuance of municipal securities is regulated by a. the securities and exchange commission b. the consumer financial protection bureau c. their respective state governments d. the federal reserve

c

Treasury bond dealers a. quote on 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

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

Which of the following is not an example of a municipal bond? a. general obligation bond b. revenue bond c. treasury bon d. all of the above

c

`for bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specifed price but makes no guarantee to the issuer a. floating valye b. variable proceeds c. best efforts d. firm commitment

c

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

A call provision on bonds normally a. allows the firm to sell new bonds at par value b. gives the firm to sell new bonds above market value c. allows the firm to sell bonds to the Treasury d. allows the firm to buy back bonds that it previously issued

d

Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10% coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is __________ percent a. 9.96 b. 10 c. 10.33 d.10.24

d

For bonds issued under a ________ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price. a. specific value b. fixed proceeds c. best efforts d. firm commitment

d

Which of the following is not mentioned in your text as a protective covenant? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. the appointment of a trustee in all bond indentures

d

Which of the following would not be a likely example of a protective covenant provision? a. a limit on the amount of the dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. a call feature

d

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