fin 7
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
.05 / (1 - t*) = .07.
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?
5-year TIPS
Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
7- year income bond.
The taxability risk premium compensates bondholders for which one of the following?
A bond's unfavorable tax status.
A bond that is payable to whomever has physical possession of the bond is said to be in:
Bearer form
A sinking fund is managed by a trustee for which one of the following purposes?
Early bond redemption
A bond's coupon rate is equal to the annual interest divided by which one of the following?
Face Value
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?
Face Value
Treasury bonds are:
Generally issued as semiannual coupon bonds.
Road Hazards has 12-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:
In registered form
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
Liquidity
Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?
List of collateral used as bond security
Which bond would you generally expect to have the highest yield?
Long-term, taxable junk bond
You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
Long-term; zero coupon.
Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?
Maintained a fixed real rate of return.
The current yield is defined as the annual interest on a bond divided by which one of the following?
Market Price
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
Market price of the bond will decrease.
A Treasury yield curve plots Treasury interest rates relative to which one of the following?
Maturity
The bond principal is repaid on which one of these dates?
Maturity Date
Interest rates that include an inflation premium are referred to as:
Nominal rates
Municipal bonds:
Pay interest that is federally tax free.
A deferred call provision is which one of the following?
Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:
Protective covenants
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
Real rate.
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
Which one of the following statements concerning bond ratings is correct?
Split-rated bonds are called crossover bonds.
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:
Spread
Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this?
Structured note.
The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:
Taxes and default risk.
The pure time value of money is known as the:
Term structure of interest rates
Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?
The bonds will sell at a premium if the market rate is 5.5 percent.
Which one of the following statements is correct?
The real rate must be less than the nominal rate given a positive rate of inflation.
Which one of the following statements is false concerning the term structure of interest rates?
The term structure of interest rates and the time to maturity are always directly related.
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield-to-maturity is less than the coupon rate.
A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?
Two month's interest.
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 the:
Call Premium
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
Callable
A call-protected bond is a bond that:
Cannot be called at this point in time
Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
Debenture
Which one of the following relationships is stated correctly?
Decreasing the time to maturity increases the price of a discount bond, all else constant.
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?
Default risk
Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:
Dirty price
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?
Dirty price.
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
Greater than 7 percent.
A zero coupon bond:
Has more interest rate risk than a comparable coupon bond.
Callable bonds generally:
Have a sinking fund provision
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
Increases at a decreasing rate.
Real rates are defined as nominal rates that have been adjusted for which of the following?
Inflation
The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.
Inflation.
Cat bonds are primarily designed to help:
Insurance companies fund excessive claims.
Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?
Interest rate risk
A "fallen angel" is a bond that has moved from:
Investment grade to speculative grade.
Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?
It has a "make whole" call price
Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?
Note
Which one of these is a negative covenant that might be found in a bond indenture?
The company cannot lease any major assets without bondholder approval.
A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent?
The current yield exceeds the coupon rate.
The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?
Yield to Maturity
You own a bond that has a 6 percent annual coupon and matures five 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?
You will realize a capital gain on the bond if you sell it today
A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?
Zero coupon
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity
a discount; less than
The price sensitivity of a bond increases in response to a change in the market rate of interest as the:
Coupon rate decreases and the time to maturity increases.
The collar of a floating-rate bond refers to the minimum and maximum:
Coupon rates.
A note is generally defined as:
An unsecured bond with an initial maturity of 10 years or less
A bond is quoted at a price of $1,011. This price is referred to as the:
Clean price
The interest rate risk premium is the:
Compensation investors demand for accepting interest rate risk
Bonds issued by the U.S. government:
Are considered to be free of default risk.
Protective covenants:
Are primarily designed to protect bondholders.
U. S. Treasury bonds:
Are quoted as a percentage of par.
Which one of the following is the price at which a dealer will sell a bond?
Asked price
If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive?
Bid price
Which one of these statements is correct?
Bonds provide tax benefits to issuers
You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?
Comparable real rate.
Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to:
Convert the bond into equity shares.
Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?
Coupon
Which one of the following relationships applies to a par value bond?
Coupon rate = current yield = yield-to-maturity
Which one of the following applies to a premium bond?
Coupon rate > current yield > yield to maturity.
Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?
Warrant.
A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond?
Yield to maturity less than the coupon rate.