Economics of Financial Institutions- Chapter 6

Coupon rates on U.S. Treasury notes and bonds are set at multiples of ______ percent when issued.

0.125

A 10-year Treasury note can be separated into ______ individual STRIP securities. 20 11 21 10

21 Reasoning: 21=20 semiannual coupons + repayment of principal

A $1,100 face value corporate bond with a 6.6 percent coupon (paid semiannually) has 11 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.3 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.6 percent. What will be the change in the bond's price in dollars and percentage terms? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your percentage answers to 3 decimal places. (e.g., 32.161))

A: B:

A municipal bond you are considering as an investment currently pays a yield of 6.75 percent. a. Calculate the tax equivalent yield if your marginal tax rate is 28 percent.b. Calculate the tax equivalent yield if your marginal tax rate is 21 percent.

A: 9.375% B: 8.544%

True or False: A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principal is paid by final maturity

False

True or False: The dirty price plus accrued interest is called the clean price of the security

False Reasoning: Clean price plus accrued interest is the dirty price

True or False: With TIPS, the coupon rate is changed every 6 months by the inflation rate as measured by the CPI

False Reasoning: The coupon rate is fixed at issuance, and does not change over the life of the security. The inflation rate as measured by the CPI may affect the market value of the security, but not the coupon rate.

True or False: Revenue bonds are backed by the full revenue of the municipality

False: Reasoning: Revenue bonds are supported by a specific revenue source, such as income from a toll road or sewer system

True or False: All else held constant, callable bonds have lower required yield than similar convertible bonds

False; Reasoning: Investors in callable bonds face the risk of having their bonds called away if interest rates decrease, which can limit potential capital gains. Convertible bonds often have lower yields compared to non-convertible bonds because investors receive the potential for capital appreciation through conversion.

With respect to private placements of bonds, which of the following is correct? I. Issuers of privately placed bonds tend to be less well known than public bond issuers. II. Interest rates on privately placed debt tend to be higher than for similar public issues. III. Purchasers of privately placed debt have assets of at least $1 million. IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity.

I, II, and III only

Convertible bonds are: I. options attached to bonds that give the bond holder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.

IV only

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a:

STRIP

What's traded in capital markets?

Stocks, bonds, currencies, and other financial assets

Which of the following situations would require an increase in the coupon rate for a bond selling at par? The addition of a convertibility option The addition of a sinking fund provision The addition of a call provision All of these choices are correct. The increase in the rating from BBB to AA

The addition of a call provision Reasoning: Call provisionbefore maturity increase risk for the investor because they may have to reinvest the returned prinicpal at a lower interest rate. So, the coupon rate of bond would need to be incresed to remain attractive.

For a Treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ______ divided by ______. actual days since last coupon; actual days in coupon period actual days since last coupon; 360 days since last coupon assuming a 30 day month; 180 actual days since last coupon; 180

actual days since last coupon; actual days in coupon period

The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation. change; ask price asked yield; ask price asked yield; bid price change; bid price

asked yield; ask price

The _______ is the yield to maturity on the Treasury note or bond using the ________ in the calculation. asked yield; ask price asked yield; bid price change; ask price change; bid price

asked yield; ask price

If the terms of repayment are not met by the bond issuer (borrower), the bond holder (investor) has a claim on the ______ of the bond issuer. A. preffered dividends B. net income C. regular dividends D assets

assets

Standard revenue bonds are: backed by the U.S. Treasury. collateralized by the earnings from a specific project. always offered with a best efforts offering. backed by the full taxing authority of the municipality. backed by mortgages.

collateralized by the earnings from a specific project.

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from

default risk

Unlike Treasury bills, Treasury notes and bonds are subject to _______ risk and _______.

interest rate risk; liquidity risk

Bonds are ________ debt obligations traded in _______ markets. long-term; capital short-term; capital short-term; money long-term; money

long-term; capital

Because Treasury notes and bonds are free from default risk, they pay relatively _______ rates of interest to investors.

low

A STRIP is a Treasury security in which ________ and ________ can be separated and sold as individual securities.

semiannual coupon payments; repayment of principal

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________. A. taxable at the state level; taxed at the federal level B. taxable at the federal level only; exempt from federal taxes C. tax-exempt; exempt from state taxes D. exempt from federal taxes; exempt from all taxes E. taxable at the state level only; exempt from state taxes only

taxable at the federal level only; exempt from federal taxes

The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.

the national debt; other government expenditures

What's traded in money markets?

treasury bills, negotiable CD's, commercial paper, federal funds, short-term mortgage-backed securities and asset-back securities

Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security. a multiple; coupon payment a multiple; face value a percentage; coupon payment a percentage; face value

a percentage; face value

True or False: "Off the run" Treasury securities are considered to be more risky

True

True or False: "On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.

True

True or False: Accrued interest owed to the bond seller increases as the next coupon payment data approaches

True

True or False: An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture

True

True or False: Bonds rated below Baa by Moody's or BBB by S&P are junk bonds

True

True or False: Capital markets are markets where securities are traded

True

True or False: During the financial crisis, China and Japan bought hundreds of billions of dollars of debt issues by the U.S. Treasury as a chance to build up their foreign reserves

True

True or False: Interest payments on municipal bonds are exempt from federal income taxes and most state and local income taxes.

True

True or False: Sovereign bonds are long-term debt issued by governments of foreign countries.

True

True or False: Sovereign bonds have high risk because the payment cannot be forced by creditors

True

True or False: T-notes and T-bonds are issued in minimum denominations of $100, or multiples of $100

True

True or False: Treasury notes and bonds trade in very active secondary markets.

True

True or False: In a Treasury bond quote with a $1,000 face value, you find the bid is equal to 100-24 and the ask is equal to 100-26. You could buy this bond for $1,008.125.

True Reasoning: