Chapter six: bonds
negative because she purchased the bond at a premium and the bond price will approach its face value as it nears its maturity
Stephanie purchased a corporate bond that matures in three years. The bond has a coupon interest rate of 9 percent and its yield to maturity is 6 percent. If market interest rates remain constant and Stephanie sells the bond in 12 months, her capital gain from holding the bond will be: a. positive because she purchased the bond at a discount and the bond price will approach its face value as it nears its maturity. b. negative because she purchased the bond at a discount and the bond price will approach its face value as it nears its maturity. c. positive because she purchased the bond at a premium and the bond price will approach its market price as it nears its maturity. d. negative because she purchased the bond at premium and the bond price will approach its face value as it nears its maturity. e. positive because she purchased the bond at a discount and the bond price will approach its market price as it nears its maturity.
market value
The _____ of a bond fluctuates continuously during its life. a. principal value b. face value c. maturity value d. coupon rate e. market value
call price; the number of years until the bond can be first called
The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM), except that we substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity. a. market price; the number of years until the bond can be first called b. face value; five years c. call price; the number of years until the bond can be first called d. principal value; 10 years e. issue price; the number of years until the bond can be first called
$1,115.57
A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent, how much should the investor be willing to pay for this bond? a. $941.36 b. $1,051.25 c. $1,115.57 d. $1,391.00 e. $1,113.00
11.26%
A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity. a. 6.05% b. 10.00% c. 10.06% d. 8.59% e. 11.26%
false
A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.) True or False
trustee
A _____ is assigned to represent the bondholders and to guarantee that the terms of the indenture are carried out. a. federal government agent b. trustee c. liquidator d. negotiator e. rating agency
a bond has a higher issuance cost
A bond differs from a term loan in that: a. a bond issue is negotiated between a financial institution and an investor. b. a bond is sold to a financial institution only. c. a bond is always offered to the public at a variable coupon rate. d. a bond has a higher issuance cost. e. a bond involves minimal formal documentation.
retire a portion of the bond issue each year
A bond sinking fund provision requires a firm to: a. issue bonds every year to finance interest payment on bonds. b. retire a portion of the bond issue each year. c. increase the coupon rate by one percent every year. d. use annual interest payments for the repayment of bonds. e. gradually reduce the face value of debt to the level of market value of debt.
putable bond
A bond that can be redeemed for cash at the bondholder's option when certain circumstances exist is called a(n): a. convertible bond. b. putable bond c. callable bond. d. debenture. e. income bond.
zero coupon bond
A bond that pays no annual interest but is sold at a discount below its par value is called a: a. mortgage bond. b. callable bond. c. convertible bond. d. putable bond. e. zero coupon bond.
true
A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%. True or False
is it repaid at the maturity date
A bond's principal value is also referred to as the maturity value because: a. it is always repaid at a discount prior to the bond's maturity. b. it is written on the face of the debt contract. c. it is repaid at the maturity date. d. it is added to interest payments that are repaid at the maturity date. e. it is issued at a value below par value to generate a positive capital gain.
false
A call provision gives bondholders the right to demand, or "call for," the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates. True or False
a time deposit at a bank or other financial intermediary.
A certificate of deposit represents: a. a promissory note of payment by a bank that borrows reserves from another bank. b. a deposit in a checking account in a bank. c. a promissory note of payment by the issuing institution to the investor. d. a time deposit of a state government with the federal government. e. a time deposit at a bank or other financial intermediary.
a term loan
A contract that is negotiated directly between a borrowing firm and a bank and under which the borrower agrees to make a series of interest and principal payments to the bank on specific dates is called: a. preferred stock. b. commercial paper. c. convertible debt. d. a term loan. e. a bond issue.
market value; face value of the debt
A debt is said to be selling at par, when the _____ of the debt is equal to the _____. a. par value; discounted value of the interest payments b. principal value; discount on the issue of a zero coupon bond c. face value; premium payment on the exercise of a call provision d. market value; face value of the debt e. maturity value; par value of the debt
convertible
A(n) _____ bond can be exchanged for shares of equity at the owner's (bondholder's) discretion. a. debenture b. indenture c. callable d. convertible e. putable
negotiable
A(n) _____ certificate of deposit (CD) can be traded to other investors prior to maturity. a. exchangeable b. operating c. negotiable d. mature e. commercial
sinking fund
A(n) _____ is a provision that facilitates the orderly retirement of a bond issue. a. amortization fund b. depreciation fund c. redemption fund d. conversion fund e. sinking fund
a greater interest rate price risk on a long-term bond than on a short-term bond
All else being equal, an increase in the yield to maturity of a bond will result in: a. an increase in the market price of the bond. b. a great interest rate price risk on a long-term bond than on a short-term bond. c. an increase in the maturity value of the bond. d. a decrease in the rate of return at which the cash flows from the portfolios can be reinvested. e. a lower risk of suffering losses in the market values of the bond portfolios.
true
Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock. True or False
$875.38
An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it? a. $1,122.87 b. $1,003.42 c. $875.38 d. $950.75 e. $877.11
false
As junk bonds are high-risk instruments, the returns on such bonds are not very high. True or False
$1,207.57
Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? a. $1,204.33 b. $1,207.57 c. $986.43 d. $1,089.53 e. $438.10
$828
Assume that an investor wishes to purchase a 20-year bond with a maturity value of $1,000 and semiannual interest payments of $40. If the investor requires a 10 percent simple yield to maturity on this investment, what is the maximum price she should be willing to pay for the bond? a. $830 b. $674 c. $761 d. $828 e. $902
yield to maturity
a change in market conditions causes the market price of a bond to change because of changes in the bond's: a. coupon rate. b. current (interest) yield. c. yield to maturity. d. principal value. e. maturity value.
mortgage bond
a debt backed by some form of specific property is known as a: a. debenture. b. mortgage bond. c. subordinated debt. d. U.S. government bond. e. general obligation municipal bond.
adjust their reserves
Banks generally use the federal funds market to: a. repay loans to investors. b. adjust their reserves. c. make interest payments on loans. d. make security deposits with other banks. e. repay loans to the federal government.
borrow from banks with excess reserves
Banks that need additional funds to meet the reserve requirements of the Federal Reserve: a. borrow from the state government of the state where their headquarters are located. b. borrow from banks with excess reserves. c. issue treasury bills to investors. d. decrease the coupon interest rate on the bonds issued to raise funds. e. exercise the call option on the loans extended to small businesses.
cost of using such debt and thus the bond's interest rate
Because a bond's rating serves as an indicator of its default risk, the rating has a direct, measurable influence on the firm's: a. earnings per share and thus the dividends it pays each year. b. cost of using such debt and thus the bond's interest rate. c. ability to procure raw material for production. d. tax liability to the federal government. e. current assets and the bond's maturity value.
false
Because short-term interest rates are much more volatile than long-term rates, an investor would, in the real world, be subject to much more interest rate price risk if he or she purchased a 30-day bond than if he or she bought a 30-year bond. True or False
true
Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10 percent currently have a yield to maturity (YTM) equal to 8 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at a premium in the financial markets. True or False
a discount
Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets. a. the par value b. a discount c. a premium d. the inflation adjusted interest rate e. a floating interest rate
false
Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest rates. They affect the actual maturity of the bond but not its price. True or False
4%
Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. Which of the following is the annual coupon interest rate? a. 8% b. 6% c. 4% d. 2% e. 0%
promissory note
Commercial paper is a type of: a. promissory note. b. credit note. c. debit note. d. bond indenture. e. T-bill.
$100,000 or more
Commercial paper is issued in denominations of: a. $10 only. b. $100 or less. c. $1,000 only. d. $100,000 or more. e. $1,000,000 only.
$550
Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The face value of the bond is $1,000. The required simple rate of return on this debt has now risen to 16 percent. What is the current value of this bond? a. $1,273 b. $554 c. $7,783 d. $550 e. $450
false
In general, long-term unsecured debts have lower interest rates (costs) than long-term secured debts for a particular firm. True or False
$927.68
Emily is contemplating the purchase of a 20-year bond that pays $50 interest every six months. The face value of the bond is $1,000. She plans to hold the bond for 10 years and sell it. She requires a 12 percent annual return but believes that the market will give only an 8 percent return when she sells the bond 10 years from now. Assuming she is a rational investor, how much should she be willing to pay for the bond today? a. $1,126.85 b. $885.30 c. $737.50 d. $927.68 e. $856.91
false
Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States. True or False
true
Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located. True or False
false
Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI). True or False
true
Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise. True or False
false
Foreign debt is a debt instrument sold in a country other than the one in whose currency that the debt is denominated. True or False
subordinated debenture
In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off. a. debenture b. income bond c. indenture d. subordinated debenture e. mortgage bond
$43,796
GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago. The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent, what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption? a. $43,858 b. $50,127 c. $37,532 d. $43,796 e. $39,422
government's ability to tax its citizens
General obligation bonds are backed by the: a. revenue generated from the project in which the bond proceeds are invested. b. government's ability to tax its citizens. c. penalty collected from the earlier repayment of a certificate of deposit. d. increase in the coupon rate due to inflation adjustment. e. additional principal received from exchange rate fluctuations.
firm will find it difficult to find potential investors when issuing new bonds
If Standard & Poor's ratings of a firm's bonds is below BBB, the _____. a. firm will find it difficult to find potential investors when issuing new bonds b. default risk premium associated with the bonds will be less than the risk premium associated with bonds rated AAA c. firm will easily find investors when issuing new bonds because bonds with high yields have no risk associated with them d. default risk associated with the bonds is less than that of bonds that are rated AAA e. firm will immediately have to exercise the call provision and issue new bonds
true
If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and effectively refinance its debt at a lower rate. True or False
true
If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears. True or False
false
If a bond's yield to maturity is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value. True or False
false
If a firm raises capital by selling new bonds, the buyer is called the "issuing firm" and the coupon rate is generally set equal to the firm's required rate. True or False
yield to maturity
If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's: a. coupon rate. b. yield to maturity. c. yield to call. d. current yield. e. capital gains yield.
a lower rate of return on reinvested cash flows
If interest rates decline, bondholders will earn: a. a lower rate of return on return on reinvested cash flows. b. a higher current yield. c. no capital gain on the bond's maturity. d. a lower coupon interest on the bond. e. a higher maturity value on the maturity date.
selling at a premium; i.e., the bond's market price should be greater than its face value.
If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be: a. selling at a discount; i.e., the bond's market price should be less than its face (maturity) value. b. selling at a premium; i.e., the bond's market price should be greater than its face value. c. selling at par; i.e., the bond's market price should be the same as its face value. d. a floating-rate bond yielding market adjusted interest. e. an indexed bond that adjusts interest payments on the basis of an inflation index.
true
If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield. True or False
2,596
JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years and a par value of $1,000 and pay $40 interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise additional capital of $2 million? Fractions of bonds cannot be issued. (Round the number of bonds to the nearest whole number.) a. 2,404 b. 2,596 c. 3,073 d. 5,282 e. 4,275
risks are higher
Lower-rated bonds offer higher returns than higher-grade bonds because their: a. coupon interest rates steadily increase throughout their lives. b. risks are higher. c. maturity values are higher than their market values. d. returns are attractive to risk-averse investors. e. returns are tax free.
true
Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not. True or False
9.2%
Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds? a. 7.8% b. 8.7% c. 9.2% d. 10.2% e. 12.9%
equal to 12 percent
Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is: a. equal to 12 percent. b. greater than 12 percent. c. less than 12 percent. d. equal to 7.2 percent. e. greater than 16.8 percent.
coupon rate of interest must be greater than 11.5 percent
Omega Software Corporation's bond with a face value of $1,000 is currently selling at a premium in the financial markets. If the bond's yield to maturity is 11.5 percent, then the bond's: a. coupon rate of interest must be less than 11.5 percent. b. coupon rate of interest must be greater than 11.5 percent. c. coupon rate of interest must be equal to 11.5 percent. d. maturity value must be greater than $1,000. e. maturity value must be less than $1,000.
the maturity value of the debt is to be repaid
On the maturity date, _____. a. the maturity value of the debt is to be repaid. b. the first installment of the installment loan is due c. the interest payment is due d. the market interest rate rises above the coupon rate e. the market price of the bond rises above the face value of the debt
lower than
Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision. a. higher than b. lower than c. the same as d. moving with e. unrelated to
investment grade with medium investment risk
Per Standard & Poor's Corporation (S&P), a bond whose rating is BBB is considered: a. a junk bond with low investment risk. b. high quality with zero investment risk. c. investment grade with medium investment risk. d. substandard with high investment risk. e. speculative with extremely high investment risk.
true
Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate movements. For example, if interest rates rise, bond prices fall. True or False
raise funds for projects that generate revenues that will contribute to payment of interest and the repayment of debt
Revenue bonds are used to: a. raise funds to repay loans borrowed from the federal government. b. raise funds for projects that generate revenues that will contribute to payment of interest and the repayment of debt. c. raise funds to pay interest on T-bills issued by the state government. d. raise funds to repay the interest and principal on loans borrowed from the local government. e. raise funds for projects that require additional funding by increasing tax rates.
$841.15
Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond. a. $841.15 b. $1,238.28 c. $904.67 d. $757.26 e. $844.45
bondholder to exchange his or her bonds for the company's common stock
The conversion feature of a bond permits a: a. company to convert a high coupon rate bond into a lower coupon rate bond. b. bondholder to exchange his or her bonds for the company's common stock. c. bondholder to redeem a small percentage of the bond every year. d. company to convert the face value of the bond to the market price of the bond. e. company to trade outstanding bonds with a term deposit in a financial institution.
the bond will go into default.
The credit rating assigned to a bond reflects the probability that: a. the bond's face value will increase above its market value. b. the bond will got into default. c. the company will earn extremely high returns on its bond's sinking fund investments. d. the bond's maturity value will become lower than its principal value. e. the firm will exercise a call provision on the bond.
earn a lower return on the reinvested cash flows
The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment, the bondholders will: a. receive a lower market value for the bond. b. receive a higher principal at the maturity of the bond. c. call back the bond before its maturity. d. earn a lower return on the reinvested cash flows. e. receive a lower coupon interest than mentioned in the bond indenture.
6%
The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today? a. 8% b. 6% c. 4% d. 2% e. 1%
17%
The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. From the given information, calculate the annual coupon rate on the bond. a. 10% b. 12% c. 14% d. 17% e. 21%
maturity date
The date on which the principal amount of a debt is due is the: a. maturity date. b. reinvestment date. c. issue date. d. repurchase date. e. priority date.
the principal value written on the face, or outside cover, of a debt contract
The face value of a debt is: a. the principal value written on the face, or outside cover, of a debt contract. b. always equal to the market value of the debt. c. equal to the principal value minus the interest payments to investors. d. always greater than the maturity value of the debt. e. added to the interest payments to find the maturity value of the debt.
false
The financial pages of the local newspaper helped Mary in identifying that she can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, the annual interest payments equal $80. True or False
default risk premium (DRP) associated with the bond
The greater a bond's default risk, the greater the: a. maturity value of the bond. b. chance the firm will exercise the call provision on the bond. c. interest rate stability of the bond in the long run. d. investment in the bond by risk-averse investors. e. default risk premium (DRP) associated with the bond.
the amount owed to the lender
The par value of debt is: a. the amount added to interest payments to be repaid at the maturity date. b. the amount owed to the lender. c. the sum of all interest payments during the life of the debt. d. the amount of adjustment in the maturity value of the debt due to interest rate fluctuations. e. the sum of interest and inflation adjusted par value of debt.
interest yield plus a capital gains yield.
The percentage rate of return that investors earn on a bond consists of a(n): a. interest yield plus a capital gains yield. b. interest yield plus the maturity value of the bond. c. expected interest yield plus the principal value of the bond. d. expected capital gains yield plus the future value of coupon payments. e. market interest rate plus the coupon interest rate.
face value
The principal value of a bond generally is written on the outside cover of the debt contract, so it is sometimes called the: a. maturity value. b. premium value. c. yield value. d. face value. e. discounted value.
no precise formula
The ratings of a firm's bonds are based on: a. the firm's ratio of current liabilities to total assets. b. the dividends paid in the last year by the firm. c. the earnings per share of the shareholders of subsidiary firms. d. exchange rate fluctuations of the U.S Dollar and Euro. e. no precise formula.
revenue bonds and general obligation bonds
The two principal types of municipal bonds are: a. general obligation bonds and indexed bonds. b. income bonds and putable bonds. c. revenue bonds and general obligation bonds. d. floating-rate bonds and indexed bonds. e. floating-rate bonds and revenue bonds.
True
There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse). True or False
15.76%
Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal $1,120. Currently, the bond is selling for $989.What is the bond's yield to call (YTC). a. 7.88% b. 15.76% c. 12.45% d. 12.17% e. 12.56%
false
Unlike bonds issued in the United States, which are bearer bonds, Eurobonds are typically issued as registered bonds. True or False
must return it to the issuing institution.
When liquidating a traditional certificate of deposit (CD) prior to maturity, the owner: a. must repay the interest due on the CD. b. must return it to the issuing institution. c. must refund the difference in the face value and market value of the CD to the issuing institution. d. must claim the interest earned by the bank by investing the CD amount. e. must deposit the amount equivalent to the CD amount in a savings account with the same bank.
Percentage rate of return on a bond = Current yield + Capital gains yield
Which of the following equations is used to compute the percentage rate of return on a bond? a. Percentage rate of return on a bond = Current yield + Coupon rate of interest b. Percentage rate of return on a bond = Current yield + Capital gains yield c. Percentage rate of return on a bond = Market return + Maturity value d. Percentage rate of return on a bond = Market yield + Current yield e. Percentage rate of return on a bond = Market yield + Capital gains yield
an increase in interest rates
Which of the following events would make it less likely for a company to choose to call its outstanding callable bonds? a. An increase in interest rates b. A decrease in interest rates c. A decrease in the price of outstanding convertible bonds d. A low call premium e. A decrease in the call value
investors can choose to hold the company's bonds or convert the bonds into its common stock
Which of the following is an advantage of convertible bonds? a. Investors can convert the bonds into higher coupon rate bonds. b. Investors can choose to hold the company's bonds to convert the bonds into its common stock. c. Investors are paid a penalty on the conversion of the bonds. d. Investors are redeemed for the difference between the face value and the market price on redemption of the bonds. e. Investors can claim interest for the remaining life of the bonds on the bonds' early conversion.
Speed, or how long it takes to bring the issue to the market
Which of the following is generally considered an advantage of term loans over corporate bonds? a. Higher flotation costs b. Speed, or how long it takes to bring the issue to the market c. Fixed bond terms after the bond has been issued d. Regular interest and principal payments on specified dates e. Standard terms of issue requiring no negotiation between the borrowing firm and the financial institution
CCC
Which of the following ratings by Standard & Poor's (S&P) is given to speculative bonds with extremely high credit risk? a. A b. B c. BB d. BBB e. CCC
the market price of the bond will increase and will approach its face value as the maturity date gets closer
Which of the following statements about a bond that is selling at a discount is correct? a. Because the coupon rate remains constant, the market value of the bond also remains constant throughout its life. b. The market price of the bond will be greater than the bond's face value. c. The market price of the bond will increase and will approach its face value as the maturity date gets closer. d. Both the market price of the bond and the interest received will increase as the maturity date nears. e. The par value of the bond will increase with every increase in the market price of the bond until the maturity date is reached.
as long as market rate remain constant, the bond's capital gains yield will equal to zero
Which of the following statements about a bond that sells for its pay value is correct? a. The yield to maturity is comprised of a capital gains yield equal to the face value of the bond. b. As long as market rates remain constant, the bond's capital gains yield will equal to zero. c. The yield to maturity is comprised of an interest yield equal to the capital yield on the bond. d. The yield to maturity is equal to the present value of interest payments received from the bond. e. The yield to maturity is equal to the future value of interest payments received from the bond.
If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will sell at a premium
Which of the following statements is correct? a. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the issuer will purchase bonds in the financial markets because their prices will be less than the par value. b. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond's maturity value would be more than its par value. c. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will mature in 15 years and not in 10 years. d. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond will sell at a premium. e. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the bond's coupon rate would decrease from 10 percent to 5 percent.
a zero coupon bond is issued at a substantial discount below its par value.
Which of the following statements is true about a zero coupon bond? a. A zero coupon bond is taxed as a capital gain at the time the bond matures. b. A zero coupon bond is issued at a substantial discount below its par value. c. A zero coupon bond is issued at a coupon rate that adjusts for inflation. d. The interest received every year on a zero coupon bond is taxed as interest income. e. The discount on the issue of a zero coupon bond is written off over its life in the investor's financial statement.
commercial paper is issued at a discount
Which of the following statements is true about commercial paper? a. Commercial paper always matures in two months. b. Commercial paper is issued by bankrupt firms. c. Commercial paper pays annual interest. d. Commercial paper is issued at a discount. e. Commercial paper is issued in denominations of $100.
Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.
Which of the following statements is true about federal funds? a. Federal funds offer loans at a coupon rate that is two times the market interest rate. b. Federal funds have very long maturities, often three years or more. c. Federal funds offer loans to the state government to meet the reserve requirements of the federal government. d. Federal funds are used to repay the T-bills issued by the federal government. e. Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.
foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold.
Which of the following statements is true about foreign bonds? a. The interest rate on foreign bonds is adjusted annually for inflation. b. Foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold. c. Foreign bonds are bonds sold by a foreign borrower but convertible to bonds issued in the foreign country. d. The term Eurodebt specifically applies to any foreign bonds denominated in U.S. dollars. e. The interest rate on foreign bonds is adjusted annually for exchange rate fluctuations.
Floating-rate bonds
Which of the following types of bonds protects a bondholder against increases in interest rates? a. Floating-rate bonds b. Income bonds c. Bonds with call provisions d. Municipal bonds e. Mortgage bonds
tax-free institutional investors such as pension funds
Which of the following types of investors would be most likely to purchase zero coupon bonds? a. Retired individuals seeking income for current consumption b. Individuals in high tax brackets c. Tax-free institutional investors such as pension funds d. Risk-averse individuals anticipating increases in interest rates e. Individuals with no interest income
true
Zero coupon bonds are offered at substantial discounts below their par values. True or False
Junk
_____ bonds are high-risk, high-yield bonds that are often used to finance mergers, leveraged buyouts, and troubled companies. a. Callable b. Junk c. Convertible d. Floating-rate e. Putable
Callable
_____ bonds are often called by the firm prior to maturity. a. Floating rate b. Mortgage c. Callable d. Municipal e. Corporate
income bond
a bond that pays interest only when a firm has sufficient earnings to cover the interest payments is called a(n): a. callable bond. b. putable bond. c. convertible bond. d. income bond. e. indexed bond.
false
a bond's value will increase when interest rates increase. True or False
can be reinvested at higher rates of return
an increase in interest rates will help increase the future value of a portfolio because the cash flows produced by the portfolio: a. will increase the maturity value of the bond. b. can be reinvested at higher rates of return. c. can be used to recall high-rate bonds. d. will generate cash to pay future coupon interest. e. will decrease the yield to maturity of the bond.
the change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods
assuming other things are held constant, which of the following is correct? a. The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods. b. For a bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital gain than the capital loss stemming from an identical decrease in the interest rate. c. For any given maturity, a percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical increase in the interest rate. d. In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds. e. A 20-year bond has more interest rate reinvestment risk than a two-year bond.
the issuing price to be equal the face (par) value of the bond
at the time a bond is issued, the coupon rate is set at a level that will cause: a. the coupon rate to be equal to the yield to call on the bond. b. the market interest rate to be greater than the coupon rate of the bond. c. the yield to maturity to be less than the market yield on the bond. d. the issuing price to be equal the face (par) value of the bond. e. the market value to be greater than the maturity value of the bond.
borrow long-term capital as well as the cost of such funds
changes in a firm's bond rating affects its ability to: a. claim deductions in tax liability computation. b. procure raw material in sufficient quantity for manufacturing processes. c. increase the coupon rate on bonds issued to investors. d. borrow long-term capital as well as the cost of such funds. e. exercise a call provision on its bonds.
the date on which the last installment repayment of the principal amount is due
for installment loans, the maturity date is: a. the date on which the last installment repayment of the principal amount is due. b. the date on which the market interest rate rises above the coupon rate. c. the date on which the coupon rate rises above the market interest rate. d. the date on which the first installment payment is due. e. the date on which the last coupon interest payment is made to the bondholders.
true
foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold. True or False
price must be less than its par value
if a bond's yield to maturity exceeds its coupon rate, the bond's: a. current yield is equal to the coupon rate. b. price must be less than its par value. c. maturity value is more than its face value. d. current yield is equal to the capital gain on the maturity of the bond. e. maturity value is less than the bond's market value.
yield to call
the average rate of return earned on a callable bond if it is held until the first call date is the: a. yield to call. b. yield to market. c. yield to principal price. d. yield to issue price. e. yield to maturity.
the number of shares that the bondholder receives upon conversion of a bond
the conversion ratio is: a. the number of new lower coupon rate bonds that the bondholder receives when old bonds are converted into the newer bonds. b. the ratio of the face value of the bond to its market value. c. the number of shares of stock that the bondholder receives upon conversion of a bond. d. the ratio of the bond's old face value to its new face value. e. the number of bonds in the company's new project received upon expansion.
the principal value written on the face or outside cover, of a debt contract
the face value of a debt is: a. the principal value written on the face, or outside cover, of a debt contract. b. always equal to the market value of the debt. c. equal to the principal value minus the interest payments to investors. d. always greater than the maturity value of the debt. e. added to the interest payments to find the maturity value of the debt.
the Securities and Exchange Commission
the indentures for publicly traded bonds are approved by: a. the state government. b. the Securities and Exchange Commission. c. the federal government. d. the Public Company Accounting Oversight Board. e. the local government.
one to nine months
the maturity of commercial paper varies from: a. 10 to 15 months. b. two to three years. c. one to nine months. d. 15 to 18 months. e. three to five years.
the amount owed to the lender
the par value of debt is: a. the amount added to interest payments to be repaid at the maturity date. b. the amount owed to the lender. c. the sum of all interest payments during the life of the debt. d. the amount of adjustment in the maturity value of the debt due to interest rate fluctuations. e. the sum of interest and inflation adjusted par value of debt.
indenture
the terms and conditions of a bond are set forth in its: a. articles. b. underwriting agreement. c. indenture. d. restrictive covenants. e. call provision.
par value
when the market value of debt is the same as its face value, it is said to be selling at the: a. yield value. b. par value. c. discounted value. d. premium value. e. maturity value.
tradition CDs must be kept at the issuing institution for a specified time period
which of the following is true of a traditional certificate of deposit (CD)? a. Traditional CDs must be kept at the issuing institution for a specified time period. b. Traditional CDs pay no periodic interest. c. Traditional CDs are repaid in installments by the issuing bank. d. Traditional CDs have a floating rate of interest. e. Traditional CDs are discounted when their market price is more than issue price.
Aaa
which of the following ratings by Moody's is given to the bonds of companies that have the best credit risk? a. Caa b. Aaa c. B d. Ba e. A
the maturity date of a bond is contractually fixed
which of the following statements is true of a bond? a. The maturity value of a bond is always more than the market value of the bond. b. Interest payments on a bond increase throughout the duration of the bond. c. The maturity date of a bond is contractually fixed. d. The call provision of a callable bond is normally exercised in the last year of the bond. e. The market value of a bond is stated in the bond indenture.
