65 - Unit 13

Treasury bills are

issued in book entry form

A money market instrument is

a high-quality, short-term debt security with maturity of 1 year or less

The relationship between the time to maturity (length) and duration is

a linear one

The call feature available on some bonds

allows the issuer the option to escape high interest rates if market rates decline.

GNMA securities

are considered to be the safest of the agency issues -backed by the full faith and credit of the U.S. government

Yankee bonds

are issued by non-U.S. entities in marketplaces inside the United States

Municipal bonds generally

carry lower coupon rates than corporate bonds of the same quality

Parity price is only relevant to

convertible bonds.

Municipal bonds are often called tax-exempts. This refers to the exemption of their income from

federal income taxes

Municipal bonds are bonds issued by

governmental units at levels other than the federal.

Treasury STRIPS

have a longer duration than those paying semiannual interest -The longer the duration, the greater the interest rate risk

The owner of a convertible debt issue

is a creditor of the issuer

An investor purchasing 10 corporate bonds at a price of 102¼ each will pay

$10,225.00

All the following securities are issued at a discount

1 Treasury bills 2 commercial paper 3 zero-coupon bonds

A bond with a par value of $1,000 and a coupon rate of 6% paid semi-annually, is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor?

Interest payments of $30

The market price of a convertible bond depends on all of the following

current interest rates the value of the underlying stock into which the bond can be converted the rating of the bond

Zero-coupon bonds are sold at a

deep discount from par value and have no coupon payments

An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA-rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are

default risk interest rate risk

Current yield is determined by

dividing the annual interest payment by the current market price of the bond

Parity means

equal

direct obligation of the U.S. government

Ginnie Maes

CDS don't have what risk?

Interest Rate

LIBOR stands for

London Interbank Offered Rate

would make a corporate bond more subject to liquidity risk

Long-term maturity and Low credit rating

discounted cash flow computation

Net present value

Which of the following debt instruments does not make periodic interest payments?

T-bills

Which two of the following investments would offer your clients the best chance of minimizing inflation risk

TIPS and Common Stock

Assume that a corporation issues a 5% Aaa/AAA-rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are TRUE?

The current yield on the debenture will be higher than 5% and The dollar price per bond will be lower than par

Which of the following statements regarding U.S. government agency securities is TRUE?

They generally offer higher yields than direct U.S. obligations.

The most common collateral securing a Brady bond is

U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond

Treasury note would have a maturity

of 2 to 10 years and therefore would not be a money market instrument.

Municipal bonds are generally considered second

only to treasury instruments in relative safety.

Some analysts use the discounted cash flow to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the

present value of the par value repaid at maturity plus the present value of the coupon payments

antidilutive clauses

provide for an adjustment in the number of shares based on stock splits or stock dividends

Zero-coupon bonds eliminate what risk

reinvestment rate risk.

A bond with a basis, or yield to maturity, greater than its coupon

is trading at a discount, or below par.

The interest on municipal bonds

is usually not subject to federal income tax.

Treasury STRIPS are

zero-coupon bonds -Interest Rate Risk

Treasury notes are quoted in

32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56.

One popular method of determining the value of certain securities is discounted cash flow. Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value?

ABC Corporation debenture maturing in 25 years with a 5% coupon

The term "eurodollars" refers to

American dollars held by banks in other countries, especially in Europe

CDs are

interest-bearing debt instruments issued by banks at their face value

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when

long-term interest rates are high and beginning to decline

One would look at the average maturities when doing a cash flow analysis for

mortgage-backed pass-through securities

An investor expecting an increase in interest rates should

sell more volatile bonds and purchase less volatile bonds

When current interest rates are at 6%, you would expect a bond with a nominal yield of 4% to be

selling at a discount

Money market investments can fulfill a number of roles within a client's portfolio, including:

short-term allocation for cash balances; serving as an alternative to bonds and equities in a multiasset class portfolio to lower the overall volatility of the portfolio; and serving as part of the asset allocation strategy to get higher returns than they would receive on cash.

When an investor divides the coupon rate of a municipal bond by the reciprocal of her tax rate, she is computing the bond's

tax-equivalent yield.

The yield to maturity is

the annualized return of a bond if it is held to maturity

Annual interest payment divided by current dollar price of a bond is

the current yield

the bond with the greatest time to maturity (longest duration) will experience

the greatest fall in a rising interest rate market.

The higher the coupon

the shorter the duration.

All of the following factors have an inverse relationship to a bond's duration

yield to maturity current yield coupon rate