Finance Chapter 6

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

5B

Which one of the following bonds is the least sensitive to changes in market interest rates?

8 percent annual coupon, 4 year

Which one of the following statements is true?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

The annual interest divided by the face value of a bond is referred to as the

Coupon Rate

Which one of the following is a unique characteristic of an income bond?

Coupon payments are dependent on the issuer's income

The current yield on a bond is equal to the annual interest divided by which one of the following?

Current market price

Which one of the following might be included in a bond's list of negative covenants?

Limiting cash dividends to $1 per share or less

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

Liquidity premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

Liquidity premium

Which of the following can generally be found in a bond's indenture agreement? I. Terms of repayment II. Names of registered shareholders III. Protective covenants IV. Total amount of the bond issue

I, III, and IV only

Which of the following ratings indicate that a bond is low quality? I. Baa II. BB III. B IV. Ba

II, III, and IV only

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.

Maturity

On which one of the following dates is the principal amount of a bond repaid?

Maturity Date

Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation?

Nominal rate

The term structure of interest rates represents the relationship between which of the following?

Nominal rates on default-free pure discount bonds

What is the primary purpose of bond convenants

Protect the lender

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Sinking fund

Which one of the following statements concerning sinking funds is correct?

Sinking funds may be used to purchase bonds in the open market

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

TIPS

Which one of the following premiums is paid on a corporate bond due to its tax status?

Taxibility Premium

You've just found a 7 percent coupon bond on the market that sells for par value. What is the maturity on this bond?

The bond could have any maturity date

Which one of the following bonds is most apt to have the smallest liquidity premium?

Treasury bill

The inflation premium:

compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a:

coupon bond's yield to maturity to decrease

The value of a bond is dependent on the:

coupon rate and the yield to maturity

Zero coupon bonds:

create annual taxable income to individual bondholders.

A bond for which no specific property has been pledged as security is classified as a:

debenture.

The price at which an investor can purchase a bond from a dealer is called the _____ price.

asked

A bond dealer sells at the _____ price and buys at the _____ price.

asked; bid

The price at which a dealer will purchase a bond is called the _____ price.

bid

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

bid-ask spread

The call premium is the amount by which the:

call price exceeds the par value.

A bond has a make-whole call provision. Given this, you know that the:

call price is inversely related to the market rate of interest

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

call protected

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture.

Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

deferred call

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

downward sloping.

Municipal bonds are:

generally callable.

The yield to maturity on a discount bond is:

greater than both the current yield and the coupon rate.

The primary purpose of protective covenants is to help:

protect bondholders from issuer actions

A "floater bond" frequently has

put provision

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

semiannual

What is the price of a $1,000 face value bond if the quoted price is 102.1?

$1,021.00

Which one of the following statements is correct?

An indenture is a contract between a bond's issuer and its holders.

When you refer to a bond's coupon, you are referring to which one of the following?

Annual Interest Payment

The lowest rating a bond can receive from Moody's and still be classified as an investment-quality bond is:

Baa.

This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and interest payment. The bond that Jeff found must have been which one of the following?

Bearer form bond

Which one of the following statements is correct? (bond markets)

Bond markets are dealer based

An upward-sloping term structure of interest rates indicates:

the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

CATS

Which one of the following is the quoted price of a bond?

Clean Price

Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.? I. Registered form II. Bearer form III. Quarterly coupon payments IV. Semiannual coupon payments

I and IV only

The term structure of interest rates is affected by which of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium

I, II, and IV only

Which one of the following terms denotes for certain that a bond is unsecured?

Debenture

Which of the following combinations is ensured to decrease the interest rate sensitivity of a bond?

Decrease in the time to maturity and an increase in the coupon rate

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Default risk premium

Which one of the following is the price that an investor pays to purchase an outstanding bond?

Dirty Price

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face Value

Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. Which one of the following terms applies to this situation?

Fallen Angel

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?

Fallen Angel

Which one of the following refers to the relationship between nominal returns, real returns, and inflation?

Fisher Effect

Which one of the following individuals is most apt to purchase a municipal bond?

Highly compensated business owner

The written agreement that contains the specific details related to a bond issue is called the bond:

Indenture

A real rate of return is defined as a rate that has been adjusted for which one of the following?

Inflation

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

Interest rate risk premium

Which one of the following statements is correct regarding mortgage-backed securities (MBSs)?

Investors in MBSs are subject to real estate deflation risk

Which one of the following terms refers to a bonds rate of return that is required by the marketplace?

Yield to Maturity

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

Zero Coupon

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

humped

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium

A protective covenant:

limits the actions of the borrower

A callable bond:

may be structured to pay bondholders the current value of the bond on the date of call.

The R in the Fisher effect formula represents the:

nominal return

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

A registered form bond is defined as a bond that:

pays coupon payments directly to the owner of record.

A note is a(n)

unsecured debt that is generally payable within the next 10 years