Unit 2

According to Standard & Poors, the 4 highest grades of bonds are (highest to lowest): A) Aaa, Aa, A, Baa B) A, Aa, Aaa, B C) B, A, AA, AAA D) AAA, AA, A, BBB

D) AAA, AA, A, BBB

Difference between Eurobonds and Eurodollar bonds?

Eurobonds: pay int and principal in foreign currency Eurodollar bonds: Pay int and principal in USD *note: these instruments must be issued outside of the US

Brady Bonds carry a US government guarantee... T or F?

False

Eurodollar time deposits tend to be short-term (ranging from overnight to 180 days) and interest rates are usually based on ______

LIBOR- the London Interbank Offered Rate

what instrument is the only money mkt instrument that pays periodic interest (usually semiannually)

Negotiable CDs (Jumbo CDs)

The Brady Plan (Brady Bonds)

Plan initiated in 1989 to exchange defaulted commercial bank loans issued in less-developed countries with a security that could be carried on the banks books as a performing asset

Investment grade bonds are in the _______ categories of bond ratings

Top 4 categories (BBB or Baa +)

Bond prices have an inverse relationship with...

interest rates

Yankee bond

A dollar-denominated bond sold in the US markets by a non-US issuer.

The value of which of the following would be least likely to be impacted by changes in interest rates? A) A bank CD maturing in 5 years B) A convertible preferred stock C) A U.S. Treasury bond issued 25 years ago with a 30-year maturity D) A laddered bond portfolio

A) A bank CD maturing in 5 years Bank CDs are nonnegotiable and, as a result, will not fluctuate in price, regardless of changes to interest rates.

Current Yield Formula

Annual Interest / Current Market Price

A bond selling at a premium will always have a yield that is ____ than the coupon.

lower

high-yield bonds (junk bonds)

with ratings lower than BB/Baa, bonds that have additional risk of default

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that A) the coupon will be increased. B) the bond will go into default. C) the bond is selling at a discount. D) the bond will be called.

C) the bond is selling at a discount.

A client has TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return? A)4.00% B)-0.50% C)3.50% D)7.50%

C)3.50%

A 4.67% convertible debenture is selling at 102. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A. $25.00. B. $25.25. C. $25.50. D. $44.35.

C- $25.50... 1000/25= 40 shares, then divide current price of bond by conv ratio, 1020/40= $25.5

XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock? A)$44.00 per share B)$40.00 per share C)$22.50 per share D)$36.00 per share

D)$36.00 per share If the bond's conversion price is $40, it means the bond is convertible into 25 shares ($1,000 par value divided by the $40 conversion price). Parity means equal, so what does each share have to be worth so that 25 of them are equal to $900? Dividing $900 by 25 shares results in a parity price of $36.

Which of the following is correct regarding zero-coupon bonds? A)They eliminate reinvestment rate risk. B) They offer minimum price volatility. C) They have low interest rate risk. D) They sell at a premium.

A)They eliminate reinvestment rate risk. No reinvmt risk bc no interest pmts to reinvest

each of the following bonds mature in 10 years and have same rating, which is the most volatile: A) zero coupon w 6% yield B) zero coupon w 8% yield C) Corp bond priced at par w 6% yield D) Corp bond priced at par w 8% yield

A- Zero coupon bonds are more volatile than bonds w coupon payments. The most volatile bonds are those with the lowest yield and longest time to maturity

If an investor watches the latest t-bill auction fall from 0.71% from 0.82%, the BEST interpretation is that.. A) this weeks investors paid more for them than purchasers at last weeks auction B) this weeks investors paid less for them than purchasers at last weeks auction C) investors who purchased t-bills 12 weeks ago paid less than subsequent purchasers D) these are 52 week t-bills

A- the rates on t-bill fell, so price rose, and the investor paid more for the t-bills paid more this week than last week

A money market mutual fund would be least likely to invest in which of the following assets? A)Newly issued ​U.S. Treasury bills B)Jumbo CDs C)Repurchase agreements D)Newly issued ​U.S. Treasury notes

D)Newly issued ​U.S. Treasury notes A money market mutual fund typically invests in money market instruments—those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is A)$125 per share. B)$80 per share. C)$100 per share. D)$64 per share.

C)$100 per share. 800 divided by 8 shares = $100 *800 comes from the 80 reflecting 1,000 bond value

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 5.4% income return. The IAR suggests a stock paying a $1.73 quarterly dividend. That stock will meet the income objective if it has a current market price of A)$32.04. B)$37.37. C)$128.15. D)$78.03.

C)$128.15. The first thing to do is annualize the dividend by multiplying the $1.73 by 4. Once we have the annual dividend of $6.92, divide by 5.4% and the result is $128.148148 or $128.15 properly rounded