financial management ch 7

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? -10-year AAA coupon bond -7-year income bond -6-year, high-coupon, put bond -5-year floating rate bond -5-year TIPS

7-year income bond

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: -clean price -quoted price -spread price -dirty price -call price

dirty price

A bond's coupon rate is equal to the annual interest divided by which one of the following? -dirty price -call price -face value -current price -clean price

face value

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: -3.5 percent -less than 3.5 percent -greater than 7 percent -7 percent -greater than 3.5 percent but less than 7 percent

greater than 7 percent

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: -at par -in street form -in registered form -as callable bonds -as debentures

in registered form

A "fallen angel" is a bond that has moved from: -being publicly traded to being privately traded -investment grade to speculative grade -senior status to junior status for liquidation purposes -being a long-term obligation to being a short-term obligation -being a premium bond to being a discount bond

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 Treasure rate plus .50 percent. Which one of the following correctly describes this bond? -variable interest payments are variable -the coupon rate is 3 percent -market value is less than face value -it has a "make whole" call price -the bond rating is B

it has a "make whole" call price

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? -inflation -taxability -liquidity -interest rate risk -default risk

liquidity

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? -written record of all the current bond holders -current yield -current market price -list of collateral used as bond security -price at which a bondholder can resell the bond to another bondholder

list of collateral used as bond security

Which bond would you generally expect to have the highest yield? -short-term, inflation-adjusted bond -non-taxable, highly-liquid bond -long-term, taxable junk bond -risk-free Treasury bond -long-term, high-quality, tax-free bond

long-term, taxable junk bond

The current yield is defined as the annual interest on a bond divided by which one of the following? -par value -market price -coupon rate -face value -call price

market price

A treasury yield curve plots Treasury interest rates relative to which one of the following? -comparable corporate bond rates -maturity -market rates -the risk-free rate -inflation

maturity

The Fisher effect is defined as the relationship between which of the following variables? -real rates, inflation rates, and nominal rates -default risk premium, inflation risk premium, and real rates -interest rate risk premium, real rates, and default risk premium -real rates, interest rate risk premium, and nominal rates -nominal rates, real rates, and interest rate risk premium

real rates, inflation rates, and nominal rates

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: -premium -equilibrium -discount -spread -call price

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? -sukuk -contingent, callable bond -nono bond -structured note -put bond

structured note

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: -default, inflation, and interest rate risks -taxes and default risk -default and interest rate risks -interest rate risks and taxes -liquidity and inflation rate risks

taxes and default risk

Which one of the following statements is correct? -nominal rates exceed real rates by the amount of the risk-free rate -the risk-free rate represents the change in purchasing power -historical real rates of return must be positive -any return greater than the inflation rate represents the risk premium -the real rate must be less than the nominal rate given a positive rate of inflation

the real rate must be less than the nominal rate given a positive rate of inflation

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 the difference, if any, between this bond's clean and dirty prices today? -four month's interest -no difference -five month's interest -two month's interest -one month's interest

two month's interest

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? -current rate -risk-free rate -real rate -nominal rate -realized rate

real rate

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? -nominal rate -realized rate -current rate -risk-free rate -real rate

real 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 of the following? -face rate -coupon rate -call rate -current yield -yield to maturity

yield to maturity

A bond that has only one payment, which occurs at maturity, defines which of these types of bonds? -debenture -zero coupon -floating-rate -callable -junk

zero coupon

The taxability risk premium compensates bond holders for which one of the following? -decrease in a municipality's credit rating -possibility of default -a bond's unfavorable tax status -yield decreases in response to market changes -lack of coupon yields

a bond's unfavorable tax status

Bonds issued by the US government: -are considered to be free of default risk -are called "munis" -pay interest that is exempt from federal income taxes -generally have higher coupons than comparable bonds issued by a corporation -are considered to be free of interest rate risk

are considered to be free of default risk

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

bearer form

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? -par value -bid price -asked price -bid-ask spread -call price

bid price

A call-protected bond is a bond that: -is guaranteed to be called -cannot be called at this point in time -is currently being called -can never be called -is callable at any time

cannot be called at this point in time

A bond is quoted at a price of $1,011. This price is referred to as the: -call price -clean price -maturity date -face value -dirty price

clean price

The interest rate risk premium is the: -difference between the market interest rate and the coupon rate -difference between the yield to maturity and the current yield -compensation investors demand for accepting interest rate risk -difference between the coupon rate and the current yield -additional compensation paid to investors to offset rising prices

compensation investors demand for accepting the interest rate risk

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? -face value -yield -discount -coupon -call premium

coupon

Which one of the following relationships applies to a par value bond? -coupon rate > current yield > yield to maturity -coupon rate < yield to maturity < current yield -coupon rate > yield-to-maturity > current yield -coupon rate = current yield = yield-to-maturity -yield to maturity > current yield > coupon rate

coupon rate = current yield = yield-to-maturity

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: -time to maturity decreases -coupon rate increases -coupon rate and time to maturity both increase -coupon rate decreases and the time to maturity increases -time to maturity and coupon rate both decrease

coupon rate decreases and the time to maturity increases

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which of the following terms? -note -callable -discounted -zero-coupon -debenture

debenture

Which one of the following relationships is stated correctly? -increasing the coupon rate decreases the current yield, all else constant -decreasing the time to maturity increases the rice of a discount bond, all else constant -an increase in market rates increases the market price of a bond -the call price must equal the par value -the coupon rate exceeds the current yield when a bond sells at a discount

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 -interest rate risk -taxability -liquidity -inflation

default risk

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: -increases at a constant rate -decreases at an increasing rate -decreases at a decreasing rate -increases at a decreasing rate -increases at an increasing rate

increases at a decreasing rate

The bond principal is repaid on which of these dates? -clean date -dirty date -coupon date -maturity date -yield date

maturity date

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? -semiannual coupon -collateralized -trust deed -note -discount bond

note

Municipal bonds: -pay interest that is federally tax free -are free of default risk -generally have higher coupon rates than corporate bonds -are rarely callable -are totally risk free

pay interest that is federally tax free