Bond Basics

Which would be a rating for short term municipal debt? A. MIG 1 B. P 1 C. P 3 D. MUN 1

A. MIG 1

Which risk is unique to investing internationally in less-developed countries? A. Political risk B. Market risk C. Marketability risk D. Default risk

A. Political risk

When bonds are trading at a discount, which statement is TRUE? A. The deeper the discount, and the longer the maturity, the more volatile the bond's price movement in response to interest rate changes B. The deeper the discount, and the shorter the maturity, the more volatile the bond's price movement in response to interest rate changes C. The lesser the discount, and longer the maturity, the more volatile the bond's price movement in response to interest rate changes D. The lesser the discount, and shorter the maturity, the more volatile the bond's price movement in response to interest rate changes

A. The deeper the discount, and the longer the maturity, the more volatile the bond's price movement in response to interest rate changes

In 2019, a customer buys 5 GE 10% debentures, M '29, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2020 at 103. If the bonds are called prior to maturity, which statement is TRUE? A. The yield to call will be higher than the yield to maturity B. The yield to call will be lower than the yield to maturity C. The yield to call will be the same as the yield to maturity D. The yield to call will depend on the current market price of the bond at the time of the call

A. The yield to call will be higher than the yield to maturity

Which statement is TRUE regarding the effect of market interest rate movements on callable and puttable bond prices? A. When interest rates fall, the call price tends to set a ceiling on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond B. When interest rates fall, the call price tends to set a floor on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond C. When interest rates rise, the put price tends to set a ceiling on the market price of the bond and when interest rates fall, the call price tends to set a ceiling on the market price of the bond D. When interest rates rise, the put price tends to set a floor on the market price of the bond and when interest rates fall, the call price tends to set a floor on the market price of the bond

A. When interest rates fall, the call price tends to set a ceiling on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond

Exchange rate risk exists when making an investment in a: A. foreign security when the U.S. dollar strengthens B. foreign security when the U.S. dollar weakens C. U.S. security when the U.S. dollar strengthens D. U.S. security when the U.S. dollar weakens

A. foreign security when the U.S. dollar strengthens

The yield to maturity of a bond will: A. increase as bond prices fall B. always equal the bond's original coupon rate C. remain unchanged as bond prices fall D. remain unchanged as bond prices rise

A. increase as bond prices fall

A customer who has taken his portfolio and invested it only in money market instruments is most likely concerned with: A. purchasing power risk B. credit risk C. political risk D. business risk

A. purchasing power risk

A customer wishes to maximize liquidity and minimize interest rate risk. The best recommendation is (are): A. short term maturities B. long term maturities C. callable bonds D. non callable bonds

A. short term maturities

The nominal yield on a bond is: A. stated interest rate / bond par value B. stated interest rate / bond market value C. market interest rate / bond par value D. market interest rate / bond market value

A. stated interest rate / bond par value

A bond issue where every bond has the same issue date, interest rate, and maturity is a: A. term bond offering B. series bond offering C. serial bond offering D. combined serial and term bond offering

A. term bond offering

Bonds quoted on a percentage of par basis are generally: A. term bonds B. series bonds C. serial bonds D. short term maturities

A. term bonds

10 basis points equals: A. .01% B. .1% C. 1% D. 10%

B. .1%

A 20-year bond is issued in 2019 with the following call schedule: Redemption Date Redemption Price 2029 104 2030 103 2031 102 2032 101 2033 100 and after This issue has how many years of "call protection"? A. 0 B. 10 C. 11 D. 20

B. 10

An investor expects that interest rates will decline over the next 5 years. Which of the following is an appropriate investment? A. 10 year bonds callable at par in 3 years B. 10 year bonds puttable at par in 5 years C. Very short term bonds D. Adjustable rate (reset) bonds, with an annual reset period

B. 10 year bonds puttable at par in 5 years

In 2019, a customer buys 1 ABC 10%, $1,000 par debenture, M '34, at 100. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is: A. 5.00% B. 10.00% C. 12.00% D. 15.00%

B. 10.00%

The City of Peoria, Illinois has outstanding $100,000,000 of 7% General Obligation bonds, M '39. The bonds are callable at 103, beginning 1/1/19. The bonds are currently trading at 104 ½. The call premium on the bonds is: A. 1 ½ points B. 3 points C. 4 ½ points D. 5 ½ points

B. 3 points

Which of the following would be a quote for a U.S. Government bond? A. 99.50 B. 99-16 C. 99 1/2 D. 99 8/16

B. 99-16

A debt issue is commonly referred to as "junk" if its credit rating is BELOW: A. A B. BBB C. B D. CCC

B. BBB

Which of the following are due interest from the corporation? A. Common Shareholders B. Convertible Bondholders C. Preferred Shareholders D. Warrant Holders

B. Convertible Bondholders

The price of which of the following would be MOST affected by rising interest rates? A. Low coupon, short maturity bonds B. Low coupon, long maturity bonds C. High coupon , short maturity bonds D. High coupon, long maturity bonds

B. Low coupon, long maturity bonds

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is callable at par in 5 years, while the other is callable at par in 10 years. If interest rates drop by 200 basis points shortly after issuance, which statement is TRUE? A. The bond callable in 5 years will appreciate more than the bond callable in 10 years B. The bond callable in 10 years will appreciate more than the bond callable in 5 years C. Both bonds will appreciate by equal amounts D. The rate of appreciation depends on the credit rating of the bonds

B. The bond callable in 10 years will appreciate more than the bond callable in 5 years

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 12%. Which statement is TRUE about the outstanding 10% issue? A. The bond will trade at a discount and the current yield will be lower than the nominal yield B. The bond will trade at a discount and the current yield will be higher than the nominal yield C. The bond will trade at a premium and the current yield will be lower than the nominal yield D. The bond will trade at a premium and the current yield will be higher than the nominal yield

B. The bond will trade at a discount and the current yield will be higher than the nominal yield

A "call premium" on a bond is the: A. amount by which the purchase price of the bond exceeds par B. amount by which the redemption price prior to maturity exceeds par C. amount which the redemption price at maturity exceeds par D. maximum premium at which the bond can trade over its life

B. amount by which the redemption price prior to maturity exceeds par

In 2019, a customer buys 5 GE 10% debentures, M '39. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2029 at 103. The bond is trading: A. at a premium B. at a discount C. at par D. in the money

B. at a discount

A corporation will call its debt when interest rates are: A. stable B. falling C. rising D. volatile

B. falling

A serial bond issue is one in which the bonds are issued on: A. the same date and mature on the same date B. the same date and mature on different dates C. different dates and mature on the same date D. different dates and mature on different dates

B. the same date and mature on different dates

In 2019, a customer buys 1 PDQ 10%, $1,000 par debenture, M '34, at 115. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is: A. 8.37% B. 8.69% C. 10.00% D. 10.23%

C. 10.00%

Which of the following would be a quote for a railroad bond? A. 101.25 B. 101-8 C. 101 1/4 D. 101 4/16

C. 101 1/4

Which of the following would be a quote for an airline bond? A. 105.625 B. 105-20 C. 105 5/8 D. 105 10/16

C. 105 5/8

In 2019, a customer buys 5 GE 10% debentures, M '39, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2029 at 103. The current yield on the bonds is: A. 10.00% B. 10.81% C. 11.76% D. 12.43%

C. 11.76%

Which of the following would be a quote for a manufacturing company bond? A. 99.50 B. 99-16 C. 99 1/2 D. 99 8/16

C. 99 1/2

A customer has a discretionary account at a brokerage firm. The customer calls the registered representative handling the account and states "Buy $50,000 of investment grade corporate bonds" with at least 5 years to maturity and a minimum 8% yield. To comply with the customer's instructions, the registered representative must choose bonds that are rated, at a minimum: A. Aaa B. A C. Baa D. B

C. Baa

What will not affect the marketability of a corporate bond? A. Bond rating B. Maturity C. Bond denominations D. Block size

C. Bond denominations

Which of the following are considered to be creditors of a corporation? A. Common Shareholders B. Preferred Shareholders C. Convertible Bondholders D. Right holders

C. Convertible Bondholders

All of the following rate commercial paper EXCEPT? A. Standard and Poor's B. Fitch's C. Morningstar D. Moody's

C. Morningstar

If a bond is trading at a premium, which statement is TRUE? A. The current yield will be higher than the nominal yield B. The yield to maturity will be higher than the nominal yield C. The yield to maturity will be lower than the current yield D. The nominal yield and current yield will be the same

C. The yield to maturity will be lower than the current yield

Which bond does NOT have interest rate risk? A. Zero Coupon Bond B. Long Term Bond C. Variable Rate Bond D. High Coupon Bond

C. Variable Rate Bond

How are corporate bonds quoted? A. Coupon B. Yield to Maturity C. Whole and Fractional D. Decimal

C. Whole and Fractional

When a bond increases in value due to market demand, this is termed: A. amortization B. accretion C. appreciation D. accumulation

C. appreciation

The nominal yield of a bond: A. increases as bond market prices decline B. decreases as bond market prices increase C. is unaffected by changes in market interest rates D. will vary with the earnings of the issuer

C. is unaffected by changes in market interest rates

The amount by which the purchase price of a municipal bond exceeds the par value of the bond is termed the: A. spread B. discount C. premium D. takedown

C. premium

Serial bonds are quoted on a: A. current yield basis B. discount yield basis C. yield to maturity basis D. nominal yield basis

C. yield to maturity basis

Regarding bonds with put options, all of the following statements are true EXCEPT: A. exercise of the put is at the option of the bondholder B. once the option is exercisable, the bond's price will not fall below the option price if interest rates rise C. yields on bonds with put options are higher than similar bonds without this feature D. the put option represents a floor on the market price of the bond

C. yields on bonds with put options are higher than similar bonds without this feature

Which bond will exhibit the greatest price volatility? A. 2% coupon bond with a 2 year maturity B. 0% coupon bond with a 1 year maturity C. 6% coupon bond with a 10 year maturity D. 0% coupon bond with a 9 year maturity

D. 0% coupon bond with a 9 year maturity

What is the benefit of a zero coupon bond? A. Dividend income B. Semi-annual payments C. Amortization D. Capital appreciation

D. Capital appreciation

Which of the following will increase the marketability risk of a bond? A. Active trading in that security B. The presence of numerous bids C. Round lot size transaction amount D. Large block size transaction amount

D. Large block size transaction amount

What will benefit the most from a decline in market interest rates? A. Money Market Fund B. Short Term Bond Fund C. Intermediate Term Bond Fund D. Long Term Bond Fund

D. Long Term Bond Fund

Which statement is TRUE regarding market risk for bondholders? A. To avoid market risk, investors should only buy high quality issues B. As interest rates rise, the price of short term bonds falls faster than that of long term bonds C. To avoid market risk, a customer would invest in bonds with long term maturities D. To avoid market risk, a customer would invest in bonds with short term maturities

D. To avoid market risk, a customer would invest in bonds with short term maturities

For bonds trading at a discount which yield measure would be the highest? A. Nominal B. Current C. Basis D. Yield to Call

D. Yield to Call

Purchasing power risk is the risk that: A. the issuer will default B. the security will be difficult to sell C. the security will be called prior to maturity D. inflation will reduce the value of future interest payments

D. inflation will reduce the value of future interest payments

Reinvestment risk is the risk that: A. interest rates will rise subsequent to bond issuance and interest payments will be reinvested at higher rates B. interest rates will rise subsequent to bond issuance and interest payments will be reinvested at lower rates C. interest rates will drop subsequent to bond issuance and interest payments will be reinvested at higher rates D. interest rates will drop subsequent to bond issuance and interest payments will be reinvested at lower rates

D. interest rates will drop subsequent to bond issuance and interest payments will be reinvested at lower rates

Zero coupon bonds: A. do not pay interest B. pay interest semi-annually C. pay interest annually D. pay interest at maturity

D. pay interest at maturity

Term corporate bonds are quoted on a: A. yield to maturity basis B. current yield basis C. nominal yield basis D. percentage of par basis

D. percentage of par basis

A serial bond is one that: A. makes its interest payment only at maturity B. repays the principal amount only at maturity C. makes no interest payments D. repays principal periodically over its life

D. repays principal periodically over its life