Financial Institutions CH 6

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year in the last two years.

$1,000,000; $200,000

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year for families in the last two years.

$1,000,000; $300,000

Corporate bonds are long-term bonds with a minimum denomination of ______ and coupons that are paid _______.

$1,000; semiannually

The components of a Treasury STRIP are issued to investors in minimum denominations of ______ or in multiples of ______.

$100; $100

The par value of a Treasury security to be resold as a STRIP must be in an amount that will provide semiannual coupon payments of ______ or a multiple of ______.

$100; $100

Treasury notes and bonds are issued in minimum denominations of ______ or in multiples of ______.

$100; $100

On July 1, 2012, you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent and the price quote is 98-6. The last coupon payment was May 1, 2012, and the next payment is November 1, 2012 (184 days later). The accrued interest is:

$132.61. [(8%/2) × 10,000] × (61 days since last coupon/184) = $132.61

On September 1, 2012, an investor purchases a $10,000 par T-bond that matures in 12 years. The coupon rate is 6 percent and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7 percent. The dirty price of the bond is:

$300 × PVIFA (3.5%, 24) + $10,000 × PVIF (3.5%, 24) = $9,197.08; $300 × (70/180) = $116.67; $9,197.08 + $116.67 = $9,313.75 Using the financial calculator: FV = −10,000PMT = −300N = 24I/Y = 3.5Solve for PV to get the clean price of $9,197.08; The accrued interest is (70/180) × 300 = $116.67. The dirty price is $9,197.08 + $116.67 = $9,313.75.

The initial primary market sale for corporate bonds occurs through which of the following methods?

- A private placement to a small group of investors - A public offering using an investment bank as underwriter

The initial primary market sale for municipal bonds occurs through which of the following methods?

- A private placement to a small group of investors - A public offering using an investment bank as underwriter

The major purchasers of bond market securities (investors) are

- corporations. - governments. - households. - foreign investors.

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.

- does not exceed; not convert - exceeds; convert and take a profit

The major issuers of bond market securities (borrowers) are

- governments. - corporations.

For all three bond rating agencies, ______ risk results in a ______ bond rating.

- higher; lower - lower; higher

Coupon rates on U.S. Treasury notes and bonds are set at multiples of ______ percent when issued.

0.125

Treasury bonds have original issue maturities from over _____ years.

10

Over the period 1994 to 2019, approximately ______ to ______ percent of the U.S. national debt consisted of Treasury notes and bonds.

40; 60

The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was

Detroit

Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bond holder or the bond issuer IV. Have higher required returns than noncallable bonds

II and IV only

Convertible bonds are: I. options attached to bonds that give the bond holder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.

IV only

If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is _____.

Ra = Rb(1 - T)

All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.

Ra/(1 - T)

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a:

STRIP

Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds.

TIPS

For a Treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ______ divided by ______.

actual days since last coupon; actual days in coupon period

The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation.

asked yield; ask price

The _______ is the yield to maturity on the Treasury note or bond using the ________ in the calculation.

asked yield; ask price

A sinking fund provision is _______ to investors, so bonds with a sinking fund provision generally have _______ yields than bonds without.

attractive; lower

The bond trustee is frequently a

bank trust department.

Bearer bonds are owned by the _______ and have _______ attached to the bond so the bearer can collect interest payments.

bearer; coupons

Many corporate bond issues include a _______ in their indentures which allows the issuer to require the bond holder to sell the bond back to the issuer at a set price above the par value of the bond.

call provision

Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities.

changes in the attractiveness

In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest.

clean price; does not

A bond that can be exchanged for another security of the issuing firm is called a(n)

convertible bond.

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.

coupon rate; face value

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from

default risk.

The spread measures the return premium a bond earns to compensate the investor for _______, _______ and ________.

default risk; liquidity risk; special bond provisions

Most bonds have a _______ provision in which the right to call the bond is deferred for a period of time for the benefit of the investors.

deferred call

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principal is paid by final maturity.

false

The dirty price plus accrued interest is called the clean price of the security.

false

Treasury notes, Treasury bonds, and municipal bonds are default risk free.

false

True or false: Yield changes of bond market securities were uncorrelated over the period from 1980 through 2019.

false

With ________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price.

firm commitment

When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is known as a:

firm commitment.

Two types of municipal bonds exist: _______ and _______ bonds.

general obligation; revenue

Municipal bonds backed by the full faith and credit of the issuer are called ______ bonds. Governments usually rely on ______ to make payments on these bonds.

general obligation; tax collections

Treasury STRIPS are created by and sold to investors through

government securities brokers and dealers.

Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ______ interest rates paid on publicly placed issues.

higher than

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ______ credit rating than the bond ______.

higher; issuer

Relative changes in yield spreads can result when the default risk _______ for a firm that has one bond issue with a sinking fund provision and another issue without a sinking fund provision.

increases

For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______.

inflation-adjusted principal value; semiannual coupon rate

The semiannual coupon paid on TIPS securities is based on the _______ and so ________ from period to period.

inflation-adjusted principal; may vary

If the issuing firm is in violation of the bond indentures, the bond trustee _______ and _______.

informs the bondholders; initiates legal action

Currently, only ______ and _______ as defined by the SEC can participate in private placements of bonds.

institutional investors; large investors

When a large state or local government issues municipal bonds, many _______ are interested in underwriting the bonds and the bonds can generally be sold in a _______ market.

investment banks; national

Certain institutional investors are prohibited by state and federal law from investing in bonds that are below ________, called _______ due to their risk.

investment grade; junk bonds

With best efforts underwriting, the _______ assumes the risk that the entire bond issue might not be sold.

issuing firm

Issuers of privately placed bonds tend to be _______ than public issuers.

less well known

Because mortgage bonds are backed with a claim on specific assets of the firm, they are ______ risky and have ______ yields than unsecured bonds.

less; lower

Bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market.

liquidity

Bonds are ________ debt obligations traded in _______ markets.

long-term; capital

Because Treasury notes and bonds are free from default risk, they pay relatively _______ rates of interest to investors.

low

Due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.

lower than

Investors will accept ______ interest rates on municipal bonds than on corporate bonds due the the ______ nature of municipal bonds.

lower; tax-exempt

A bond index reflects both the _________ plus _________ on a particular type of bond.

monthly capital gain or loss; coupon interest paid

Some corporate bonds and most ______ bonds are ______ bonds, meaning that the bond issue contains many maturity dates with a portion of the principal being paid off on each date.

municipal; serial

For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______.

principal value; inflation

With a _______ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner.

registered; coupon payments

Private placements of bonds are unregistered but there are restrictions on the _______ of the bonds.

resale

Bonds that are issued to finance a specific revenue-generating project and whose payments are made from those revenues are called _______ bonds.

revenue

By legally documenting the rights and obligations of all parties involved in a bond issue; the bond indenture helps lower the ______ and ______ of the bond issue.

risk; interest cost

Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid.

risky; reduce

Debenture holders generally receive their promised payments only after all ________ debt holders have been paid.

secured

A STRIP is a Treasury security in which ________ and ________ can be separated and sold as individual securities.

semiannual coupon payments; repayment of principal

Municipal bonds pay coupons

semiannually.

The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a _________ provision.

sinking fund

Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond.

stock warrants

The source of funds for repayment of municipal bonds is _______ or _______.

tax receipts; project revenues

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.

taxable at the federal level only; exempt from federal taxes

Most secondary bond market trades are carried out on ______ including virtually all _______ transactions.

the OTC market; large

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with

the economy.

The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.

the national debt; other government expenditures

Treasury STRIPS allow investors to match their ______ with the ______ of the STRIP security.

time preference for funds; maturity date

TIPS are a Treasury offering that protects investors from unexpected increases in inflation.

true

True or false: A secondary market for municipal bonds exists, though it is generally less active than the secondary market for Treasury bonds.

true

True or false: Interest payments on municipal bonds are exempt from federal income taxes and most state and local income taxes.

true

True or false: Stock warrants may be detached from the underlying bond and sold separately to another investor.

true

With firm commitment underwriting, the _______ assumes the risk that the entire bond issue might not be sold.

underwriter

The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.

upward; downward

Bearer bonds are bonds:

with coupons attached that are redeemable by whoever has the bond.

The interest rate spread is the difference between the yield on ________ and the yield on ___________.

a bond; a Treasury security of similar maturity

Prices of Treasury STRIP securities are quoted as _______ of the ______ of the security.

a percentage; face value

Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security.

a percentage; face value