Test 2 homework questions

The three major bond rating agencies are

-fitch ratings -sp standard and poor's -moody's

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

-higher/lower -lower/higher

The major purchasers of bond market securities (investors) are

-households, governments,. corporations, foreign investors

One "discount point" paid up front equals __________ of the principal value of the mortgage.

1 %

Treasury notes have original issue maturities from over _____ to _____ years.

1-10

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

1. coupon rate 2. face value

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

1. the national debt 2. other government expenditures

As of December 2018, the total dollar amount of primary mortgages outstanding was roughly

15 trillion

The most common mortgage maturities are ______ and ______ year, with fixed interest payments.

15; 30

Borrowers whose down payment is less than _______ percent of the purchase price are required to purchase ________.

20; private mortgage insurance

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

40;60

The minimum denomination for municipal bonds is typically

5000

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

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

False

Repayment of federally insured mortgages is guaranteed by either __________ or __________.

Federal Housing Administration (FHA); Veterans Administration (VA)

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 mortgage whose interest rate is tied to some market interest rate or interest rate index is called a(n) _________ mortgage.

adjustable rate

Subprime mortgages were especially susceptible to default due to rising interest rates since many of them were ________ mortgages.

adjustable rate

To boost their earnings in the risky subprime mortgage market and take advantage of low interest rates, mortgage lenders offered _________ mortgages with very low initial rates.

adjustable rate

A document listing every mortgage payment and the portion of interest and principal paid in each payment is called a(n)

amortization schedule

Eurobonds pay interest ______ using a _____-day year.

annually; 360

Conventional mortgages _________ federally insured.

are not

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 size or denomination of each primary mortgage is

based on the borrowers needs

The legal contract that specifies the rights and obligations of the bond issuer and the bond holders is called the

bond indenture

The sinking fund may be managed by the

bond trustee

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

For mortgages, the property purchased with the loan serves as ________ backing the loan.

collateral

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

convertible bond

The biggest issuers of debt in the global debt markets from 1996 through 2018 were

corporations and financial institutions

The major issuers of bond market securities (borrowers) are

corporations; governments

Individual rules and restrictions within the bond indenture are referred to as

covenants

In theory, the higher the down payment made by the borrower, the less likely it is that the borrower will

default on the mortgage

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

In the new model of mortgage markets that became popular in the 1990s and 2000s, the loan originator passed the __________ of the loan on to the loan purchaser, thus reducing the originator's incentive to monitor the borrower's _________.

default risk; credit quality

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

detroit

In most years, the currency in which the largest amount of fixed rate debt is issued is the

dollar

many eurobonds are issued in

dollars

The portion of the purchase price of a property that must be paid by the borrower at mortgage closing is called the

down payment

Bonds are usually called when interest rates _______ so the issuer can gain by reissuing new bonds with a _______ interest rate.

fall; lower

Federally insured mortgages are originated by ________ and are guaranteed by U.S. government agencies.

financial institutions

The biggest issuers of both fixed rate and floating rate debt in most years are

financial institutions

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

firm comittment

A mortgage which locks in the borrower's interest rate over the life of the mortgage regardless of how market rates change is called a(n) _________ mortgage.

fixed rate

Globally, there is far more _______ debt than ______ debt issued.

fixed rate; floating rate

Most mortgage loans are structured so each payment includes both interest and principal, such that the principal is repaid in full by the maturity date. We say that the mortgage is

fully amortized

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 obligations; tax collections

Treasury STRIPS are created by and sold to investors through

government securities brokers and dealers

The major issuers of bond market securities (borrowers) are

governments; corporations; nonprofit organizations

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _______ the price specified in the warrant.

greater 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

Privately placed bonds have traditionally been among the most _______ securities in the bond market.

illiquid

relative changes in yield spreads can result when the default risk (decreases/increases) for a firm that has one bond issue with a sinking fund provision and another issue with a sinking fund provision.

increases

Treasury notes and bonds are subject to _______ risk and _______. Multiple choice question.

interest rate risk; liquidity risk

Eurobonds are placed in the primary market by _______ using _______ offerings.

investment banks; firm commitment

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

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

A public record attached to the title of a property that serves as collateral for a mortgage is called a(n)

lien

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

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

Because jumbo mortgages are larger than most mortgages and cannot be sold to Fannie Mae or Freddie Mac, they are considered to be _______ and have _______ interest rates.

more risky; higher

Bonds that are issued to finance specific projects whose assets are pledged as collateral for the bond issue are called

mortgage bonds

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

The price of a STRIP security is the ________ of the face value of the STRIP discounted using the _________ and ________.

present value; yield to maturity; semiannual compounding

In order for secondary mortgage market buyers to purchase a conventional mortgage with a loan-to-value ratio of greater than 80 percent, the borrower must have

private mortgage insurance

A sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank and without SEC registration is called a(n)

private placement

The invention of the Eurobond was motivated by the desire to avoid ______ and _______ on debt securities issued by firms in ______.

regulations; high taxes; the US

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

risk; reduce

Municipal bonds pay coupons

semiannually

Floating-rate Eurobonds pay interest ______ using _____ as the basis.

semiannually; LIBOR

Municipal bonds are issued by ______ and ______ governments to fund a temporary imbalance between expenditures and receipts, or to finance long-term capital outlays.

state/ local

Debentures which are junior in their rights to both secured debt and regular debentures are called

subordinate debentures

Rising interest rates and falling home prices triggered mortgage defaults primarily in the ________ mortgage market.

subprime

Because general obligation bonds rely upon tax revenues for repayment, ______ is usually required.

taxpayer approval

Most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date.

term

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

the economy

Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

the inflation rate

Once attached to a title, a lien remains in place until

the loan is paid off

Foreign bonds are long-term bonds issued outside of the issuer's home country and are denominated in the currency of the country in which the

they are issued

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: Treasury notes and bonds trade in very active secondary markets.

true

Call provisions are _______ to bond holders so callable bonds generally have ______ yields than non-callable bonds.

unattractive; higher

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

Foreign bonds issued in the U.S. are called ______ bonds while foreign bonds issued in the U.K. are called _______ bonds and foreign bonds issued in Japan are called _______ bonds.

yankee; bulldog; samurai

Each STRIP security must be valued as a ________ with maturity determined by its original _______.

zero-coupon bond; payment date

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

a percentage/ face value

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

a percentage; face value

Unlike stocks and bonds, mortgages tend to be owned by

a single investor

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

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

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

a. exceeds; convert and take a profit b. does not exceed; not convert