Unit 4

A convertible corporate bond with an 8% coupon yielding 7.1% is available but may be called sometime this year. Which feature of this bond would probably be least attractive to your client?

Near-term call

In the United Kingdom, they are called gilts. In Germany, they are called Bunds. In France, they are called OATS. To investors, they are known as

sovereign debt

An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5.25% coupon rate. The investor's yearly return will increase by

$2.50 per bond. The first bonds are 5% and pay $50 per year per bond. The new bonds are 5.25% and pay $52.50 per year per bond, for a difference of $2.50 per bond.

A corporate bond is quoted at 102⅝. A customer buying 10 bonds would pay

$10,262.50

The minimum face amount of a negotiable CD is:

$100,000

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? 1. The corporation will be subject to currency risk. 2. The corporation will not be subject to currency risk. 3. The issue must be filed with the SEC. 4. The issue need not be filed with the SEC.

2. The corporation will not be subject to currency risk. 4. The issue need not be filed with the SEC.

In general, commercial paper, a popular money market instrument, has a maturity not exceeding

270 days.

The ELLA Distributing Company issued a bond with a nominal yield of 5%. The bond matures in 12 years and is currently trading at 94. The bond's yield to maturity is closest to

5.67%. [annual interest + (discount divided by the number of years to maturity)] divided by the average price of the bond Plugging in the numbers, we get a numerator of $50 + ($60 divided by 12 years) = $50 + $5 = $55. The denominator is ($940 + $1,000) divided by 2 = $1,940 divided by 2 = $970. Solve by dividing $55 by $970 and the answer is 5.67%.

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 85 is approximately

6.22% Annual interest + (discount ÷ number of years to maturity) ÷ (Current market price + par) ÷ 2)

A bond with a 9% coupon, maturing in 18 years and 6 months, is selling at 120. The yield to maturity is closest to

7.05%.

An investor is concerned about safety. When consulting the ratings, which of the following securities would appear to be least likely to default on its obligation to make timely payment of interest and principal?

AA rated debenture

It would be most unusual to see which of the following issued at a discount?

Jumbo CD. Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

A bond issued by a Swiss company, sold outside the United States and the issuer's country, but for which the principal and interest are stated and paid in U.S. dollars, is the definition of a

Eurodollar bond

A corporate bond with a nominal yield of 6% is currently trading at a yield to maturity (YTM) of 5.8%. It would be accurate to state that this bond is trading at

If YTM is less than the nominal or coupon yield, the bond is trading at a premium.

A respected analyst reports that last week's T-bill rate at 1% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is true?

Investors are paying more for T-bills. When the rate is lower, the price has gone up. This means investors are paying more as interest rates are going down.

A bond you are recommending to a customer has call protection. What does that mean?

It is the number of years into the issue before the issuer may exercise the call privilege.

Which of the following would be considered an equity security?

Preemptive rights

Which of the following is not considered a debt security?

Prior lien preferred stock

Which of the following is an example of sovereign debt?

U.S. Treasury bonds

A bond is currently priced at 96. Which of the following yields would be the highest?

Yield to maturity

The CAST Corporation's first mortgage bond has a 5% coupon and a yield to maturity of 7%. The bond is callable in 10 years at 103. The bond is trading at

a discount.

A corporation is likely to call eligible debt when interest rates are

declining.

In a discussion with one of your customers, the topic of alternative debt instruments is brought up. It seems that the customer was competing in a duplicate bridge tournament in town and one of the other competitors mentioned that they have been obtaining higher income returns from ELNs. When the customer asks you for the meaning of that abbreviation, you would reply

equity-linked notes.

A corporate bond is quoted in the Wall Street Journal as follows: Bid: 100½ Asked: 100¾ Bid Chg.: -⅛ Yield: 5.75 From this information, you know the nominal yield is

greater than 5.75%. The bid and asked prices show that the bond is being quoted at a premium (above par), with a yield to maturity of 5.75%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

A bond investor who is looking for capital gains should invest in bonds when interest rates are

high and expected to decline This is about the inverse relationship between interest rates and bond prices. As interest rates rise, bond prices fall.

One of your individual customers would like to add some foreign debt securities to their portfolio. When told that the investment would be $2,500, the best suggestion would be to

invest in a mutual fund concentrating in foreign debt securities.

All of the following statements regarding commercial paper are correct except

it is quoted as a percentage of par. Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing

long-term bonds when interest rates are high.

If interest rates increase, the interest payable on outstanding corporate bonds will

remain unchanged.

When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond's deed of trust. The deed of trust is sometimes referred to as

the indenture.

The legal contract stating the issuer's obligation to pay back a specific amount of money on a specific date to its bondholders is best described as

the trust indenture