Chapter 2 debt securities real exam
A high credit rating will do all of the following EXCEPT A) Ensure an investor will receive a certain price when the bond is sold B) Indicate a stronger degree of the bond's credit worthiness C) Give investors greater confidence in the issuer's ability to pay principal and interest D) Enhance the marketability of the bond
A Ensure an investor will receive a certain price when the bond is sold A high credit rating enhances the marketability of a bond issue because it increases investor confidence in the ability of the issuer to pay principal and interest. It does not ensure market stability or ensure that an investor will receive a certain price for the bond.
Investors that purchase high quality fixed income investments for retirement income are most concerned with A) inflation risk B) economic risk C) credit risk D) principal risk
A inflation risk Inflation risk is a major concern for investors who hold portfolios of fixed income investments for funding retirement income. As inflation increases, the purchasing power of their fixed coupon will fall.
When an issuer makes periodic payments to a trustee who retires parts of the issue periodically by purchasing bonds in the open market, the money paid to the trustee is set aside in a(n) A) sinking fund B) advance refund account C) escrow account D) debt retirement provision
A sinking fund Sinking funds are commonly used to retire corporate debt. Issuers set aside money each year by making payments to a trustee who retires part of the issue by purchasing the bonds in the open market.
An investor owns a 6% coupon bond with $1,000 par value. At maturity, the investor will receive A) 1000 B) 1030 C) 100 D) 1060
B 1030 When a bond matures, an investor receives par value plus the final semi-annual coupon payment.
Which of the following bonds typically has the least price volatility? A) A corporate zero coupon bonds B) A corporate floating rate bond C) A convertible corporate bond D) A long-term corporate bond
B A corporate floating rate bond Bonds that have a floating interest rate, also known as variable rate bonds, have little price change. The interest rate, not the price, adjusts to reflect current market conditions. Corporate zero bonds are quite volatile, as are bonds that have longer maturities.
A bond would "trade flat" for all of the following reasons except A) The settlement date of a trade coincides with an interest payment date. B) A trade occurs 30 days prior to the next coupon date. C) The settlement date coincides with the dated date. D) The bond is a zero-coupon security.
B A trade occurs 30 days prior to the next coupon date. A bond "trading flat" does not make a regular interest payment. This happens for a variety of reasons, including any trade involving a zero-coupon bond. When the settlement date and an interest payment date are different, there will be accrued interest involved in the trade.
As compared to short term bonds, bonds with a longer time until maturity usually I. have higher interest rates II. have lower interest rates III. are more marketable IV. are less marketable A) II and IV B) I and IV C) II and III D) I and III
B I and IV Longer term bonds are more risky than short term bonds. Because of this risk, they are less marketable, and must pay a higher interest rate to attract purchasers.
The length of time a debt instrument remains outstanding until the full principal amount must be repaid is known as which of the following? A) Seniority B) Maturity C) Security D) Coupon
B Maturity The maturity ("tenor" or "term") of a debt obligation refers to the length of time the instrument remains outstanding until the full principal amount must be repaid. Shorter tenor debt is deemed less risky than debt with longer maturities as it is required to be repaid earlier. Coupon refers to the annual interest rate paid on a debt obligation's principal amount outstanding. Security refers to the pledge of, or lien on, collateral that is granted by the borrower to the holders of a given debt instrument. Seniority refers to the priority status of a creditor's claims against the borrower/issuer relative to those of other creditors.
The par value of a bond is lower than the market value of the bond. Which of the following statements is true? A) The nominal yield of the bond is lower than the YTM B) The YTM of the bond is higher than the YTC C) The YTC is higher than the nominal yield D) The current yield of the bond is higher than the nominal yield
B The YTM of the bond is higher than the YTC This bond is currently trading at a premium, since the market value of the bond is greater than $1,000. As such, the highest yield on this bond will be its nominal yield, followed by the current yield, yield to maturity (YTM), and finally yield to call (YTC), in descending order.
The process by which an issuer calls bonds with a high coupon and reissues new bonds with a lower coupon is referred to as A) redeeming B) refunding C) laddering D) reissuing
B refunding When interest rates have fallen, issuers are likely to call outstanding bonds with high coupon rates and issue new bonds at the lower current rate. This process is called refunding or refinancing.
Zero-coupon bonds would be appropriate for an individual A) Who is concerned that interest rates may rise significantly from their current levels B) Seeking current income to supplement a company pension C) Designing a savings plan for retirement in twenty years D) Who is looking for a tax -free savings vehicle
C Designing a savings plan for retirement in twenty years Zero-coupon bonds would be an appropriate investment for someone who is looking to save money for a major future event, such as a child's education, a family vacation, or retirement.
There is a general increase in market interest rates. Which of the following statements is true? A) The price of a 5 year bond will increase, and will increase more than the price of a bond that matures in 30 years B) The price of a 5 year bond will fall, and will fall more than the price of a bond that matures in 30 years C) The price of a 5 year bond will fall, but will fall less than the price of a bond that matures in 30 years D) The price of a 5 year bond will increase, but will increase less than the price of a bond that matures in 30 years
C The price of a 5 year bond will fall, but will fall less than the price of a bond that matures in 30 years When interest rates rise, bond prices fall. Longer term bonds are subject to more price fluctuation than shorter term bonds.
Which of the following is characteristic of bearer bonds? A) They always pay interest quarterly. B) They have voting rights. C) They have interest coupons attached. D) They come in registered form.
C They have interest coupons attached. Bearer bonds have interest coupons attached. The interest is payable to the individual who presents the appropriate coupon.
A bond that is trading flat A) includes accrued interest in its trading price B) does not pay semi-annual interest C) does not include accrued interest in its trading price D) trades at par value
C does not include accrued interest in its trading price In certain bond markets accrued interest is included in the trading price, and in other markets it is added on after trading. A bond trading with accrued interest is trading at its "full" price; a bond trading without accrued interest is trading "flat." Examples of bonds that trade flat include zero coupon bonds and bonds in default.
Municipal bonds pay interest A) annually B) monthly C) semiannually D) quarterly
C semiannually Municipal bonds, in addition to corporate bonds and treasury notes and bonds, pay interest semiannually. Mortgage-backed securities pay interest monthly, and zeroes do not pay interest at all.
Which of the following is equal to 100 basis points? A) 0.1 B) 0.00001 C) 0.0001 D) 0.01
D 0.01 It is important to note that this answer is as a pecentage. One basis point is equal to .01%, or .0001. There are 100 basis points in 1%. To convert basis points to a percentage, move the decimal two places to the left. To convert basis points to a decimal, move the decimal point four places to the left. So, 100 basis points becomes 1.%, or 0.01.
The nominal yield on a $1,000 par value bond with a coupon of 7.5% would be which of the following? A) 1000 B) 0.07 C) 0.0714 D) 0.075
D 0.075 The nominal yield or coupon is the stated interest rate that the purchaser of a bond will be paid on the bond's par (face) value, expressed as a percentage. Hence, the nominal yield on a $1,000 par bond ($100 price) that pays a 7.5% coupon is simply 7.5%.
A bond is trading for 102 ¾. To purchase this bond an investor will pay A) 1095 B) 1023.75 C) 1020.75 D) 1027.5
D 1027.5 A bond point is $10, and 3/4 of a bond point = $7.50. $1,020 + 7.50 = $1,027.50
Which of the bonds below would subject an investor to the greatest amount of call risk? A) A 4% bond with no call premium B) A 4% bond with a call premium of 102 C) A 6% bond with a call premium of 102 D) A 6% bond with no call premium
D A 6% bond with no call premium An issuer is most likely to call bonds with a higher coupon when interest rates are falling. An issuer also prefers to call bonds that do not require payment of a call premium.
All of the following Standard & Poor's Ratings are investment-grade EXCEPT: A) BBB B) AA C) A+ D) BB
D BB The lowest S&P investment grade rating is BBB- (Triple-B minus). Below that is a non-investment grade (junk) bond.
A 10-year municipal bond, callable in 5 years, is trading at 97 7/8. Rank the following yields from lowest to highest. I. Current yield II. Nominal yield III. Yield to call IV. Yield to maturity A) II, IV, I, III B) I, II, IV, III C) II, I, III, IV D) II, I, IV, III
D II, I, IV, III When a bond is trading at a discount, nominal yield is lowest, then current yield, YTM and finally YTC.
Accrued interest is calculated from the A) Trade date up to but not including the settlement date B) Last interest payment date up to but not including the trade date C) Last interest payment date up to and including the settlement date of the trade D) Last interest payment date up to but not including the settlement date
D Last interest payment date up to but not including the settlement date Accrued interest is calculated from the last interest payment date up to but not including the settlement date of the transaction. This represents the amount of money the buyer of the bond must pay to the seller of the bond when the bond changes hands.
A bond that is issued with a call feature A) Is more marketable than a non-callable bond B) Typically pays a lower coupon than a non-callable bond C) Subjects the issuer to reinvestment risk D) Offers the issuer flexibility for refinancing its outstanding debt
D Offers the issuer flexibility for refinancing its outstanding debt Call features are advantageous to issuers, as they allow flexibility to refinance outstanding debt when interest rates fall. Call features present risk to investors, so callable bonds pay more interest than non-callable bonds. They are less marketable because of the additional risk. The investor, not the issuer, is subject to reinvestment risk.
Which of the following types of bonds do not offer periodic interest payments? A) Floating-rate bonds B) Corporate notes C) Fixed-rate bonds D) Zero-coupon bonds
D Zero-coupon bonds Zero-coupon bonds, as their name indicates, do not offer periodic interest payments during the life of the issue. Rather, they are sold at a deep discount to par value and are redeemed at the full par value at maturity. Zero-coupon bonds typically have longer maturities and allow investors to put up a small amount of capital that will grow over a number of years. Though the investors in zeros receive no actual cash interest, they are still obligated to pay income tax on the annual accrued or "phantom" interest payments. A fixed-rate bond will pay the same interest throughout the life of the issue. Floating-rate notes (FRNs) pay a floating or variable rate of interest, and are typically priced at a LIBOR plus a spread. A bond will be structured in this manner to offer investors protection if interest rates are expected to rise. Initial yields on FRNs will be lower than those of fixed-rate securities with the same maturity, given that they offer protection from interest rate risk.
