Chapter 15

Treasury bills a. sell at a discount b. sell for a premium c. pay an established 4.5% annual interest d. mature after one year

A

Municipal bonds a. pay more interest than corporate debt b. are exempt from federal income taxation c. are exempt from federal estate taxation d. reduce interest rate risk

B

Collateralized mortgage obligations (CMOs) a. are free of interest rate risk b. have certain repayment schedules c. are not exempt from federal income taxation d. increase in value when interest rates rise

C

Ginnie Maes are a. long-term bonds issued by the federal government b. short-term, mortgage-backed securities c. mortgage backed securities issued by the Government National Mortgage Association d. long-term mortgage securities sold by banks

C

Municipal general obligation bonds are a. illustrative of a revenue bond b. not illustrative of a tax-exempt bond c. supported by taxing authority d. secured by property

C

The interest on series EE bonds a. is exempt from federal income taxation b. is distributed semi-annually c. is exempt from state income taxation d. is taxed even though it is not received until the bond is redeemed

C

Which of the following is not traded in the secondary markets? a. U.S. Treasury bills b. U.S. Treasury bonds c. series EE bonds d. municipal bonds

C

Which of the following types of securities is not issued by the federal government? a. money market securities b. long term bonds c. stock d. zero coupon bonds

C

Sources of risk to investors in municipal bonds include 1. fluctuations in interest rates 2. reinvestment rate risk 3. default risk a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

D

Sources of risk to investors who purchase federal government bonds include 1. reinvestment rate risk 2. risk of inflation 3. interest rate risk a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

D

Agencies of the federal government are not allowed to issue bonds.

False

If interest rates are expected to rise, a prudent strategy would be to sell treasury bills and buy treasury bonds.

False

Interest earned on series EE bonds is exempt from federal income taxation.

False

Municipal bonds are considered to be safe investments because they may be readily sold with little chance of loss.

False

Municipal bonds are more marketable than corporate and federal government bonds.

False

Municipal bonds are registered with the Federal Reserve.

False

Poor quality municipal bonds pay more interest than poor quality corporate debt.

False

Realized returns on all federal government securities are fixed and do not change with changes in interest rates.

False

The federal government cannot issue debt that matures in less than five years.

False

The federal government only issues marketable securities such as treasury bills.

False

The prices of treasury bonds are insensitive to changes in interest rates.

False

Treasury bills are long term federal government securities sold at a discount.

False

Treasury bills are sold for a premium.

False

Yields on municipal bonds exceed yields on corporate bonds with the same term to maturity and credit rating.

False

Zero coupon bonds issued by states are not exempt from federal income taxation.

False

Collateralized mortgage obligations (CMOs) are sold in classes ("tranches") that increase the certainty of the timing of payments.

True

Federal government debt is believed to have minimal default risk because the government has the power to tax and to create money.

True

If an investor is in the 25 percent income tax bracket and can earn 5 percent on a corporate bond, then 3 percent on a municipal bond is attractive.

True

Investors who acquire indexed bonds (TIPS) avoid the risk associated with inflation.

True

Municipal bonds are exempt from federal income but not necessarily from state income taxation.

True

Municipal bonds are often examples of serial bonds.

True

Series EE bonds were initially designed to tap the funds of savers with modest sums to invest.

True

Some municipalities have their municipal bonds insured in order to facilitate marketing (issue) them.

True

The interest earned on federal government's debt is exempt from state income taxation.

True

The price of a municipal bond will tend to rise when interest rates decline.

True

There is no secondary market for EE bonds.

True

Treasury bonds may be bought and sold in the secondary markets like corporate bonds.

True