FIN 3100 - Chapter 6 SmartBook

The three major bond rating agencies are

Standard & Poor's (S&P), Moody's, and Fitch Ratings.

The interest rate spread is the difference between the yield on ________ and the yield on ___________.

a bond; a Treasury security of similar maturity

Sovereign bonds are debt issued by

a government.

Prices of Treasury STRIP securities are quoted as _______ of the ______ of the security.

a percentage; face value

The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation.

asked yield; ask price

Bearer bonds are owned by the _______ and have _______ attached to the bond so the bearer can collect interest payments.

bearer; coupons

The representative of the bond holders who monitors compliance with the bond indenture is called the

bond trustee.

The sinking fund may be managed by the

bond trustee.

Foreign bonds are long-term bonds issued outside of the issuer's home country and are denominated in the currency of the country in which the

bonds are issued.

Bonds backed solely by the general creditworthiness of the issuing firm, unsecured by specific assets or collateral, are called

debentures.

Most bonds have a _______ provision in which the right to call the bond is deferred for a period of time for the benefit of the investors.

deferred call

Under the __________ the repayment of sovereign debt cannot be forced but is subject to rescheduling, interest rate reduction, or even repudiation.

doctrine of sovereign-immunity

The biggest issuers of both fixed rate and floating rate debt in most years are

financial institutions

With ________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price.

firm commitment

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ______ credit rating than the bond ______.

higher; issuer

Privately placed bonds have traditionally been among the most _______ securities in the bond market.

illiquid

Relative changes in yield spreads can result when the default risk ______ (decreases/increases) for a firm that has one bond issue with a sinking fund provision and another issue without a sinking fund provision.

increases

If the issuing firm is in violation of the bond indentures, the bond trustee _______ and _______.

informs the bondholders, and initiates legal action

Currently, only ______ and _______ as defined by the SEC can participate in private placements of bonds.

institutional investors; large investors

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

interest rate risk; liquidity risk

When a large state or local government issues municipal bonds, many _______ are interested in underwriting the bonds and the bonds can generally be sold in a _______ market.

investment banks; national

Because mortgage bonds are backed with a claim on specific assets of the firm, they are ______ risky and have ______ yields than unsecured bonds.

less; lower

Bonds are ________ debt obligations traded in _______ markets.

long-term; capital

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

low

Investors will accept ______ interest rates on municipal bonds than on corporate bonds due the the ______ nature of municipal bonds.

lower; tax-exempt

A bond index reflects both the _________ plus _________ on a particular type of bond.

monthly capital gain or loss; coupon interest paid

Bonds that are issued to finance specific projects whose assets are pledged as collateral for the bond issue are called

mortgage bonds.

The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a _________ provision.

sinking fund

Municipal bonds are issued by ______ and ______ governments to fund a temporary imbalance between expenditures and receipts, or to finance long-term capital outlays.

state; local

The source of funds for repayment of municipal bonds is _______ or _______.

tax receipts; project revenues

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with

the economy.

Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

the inflation rate.

Treasury STRIPS allow investors to match their ______ with the ______ of the STRIP security.

time preference for funds; maturity date

Call provisions are _______ to bond holders so callable bonds generally have ______ yields than non-callable bonds.

unattractive; higher

The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.

upward; downward

Each STRIP security must be valued as a ________ with maturity determined by its original _______.

zero-coupon bond; payment date

Corporate bonds are long-term bonds with a minimum denomination of ______ and coupons that are paid _______.

$1,000; semiannually

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

Answer: 21 Reason: 21 = 20 semiannual coupons + repayment of principal

True or false: Yield changes of bond market securities were uncorrelated over the period from 1980 through 2019.

False: They were highly correlated over this time.

The bond trustee is frequently a

bank trust department.

The legal contract that specifies the rights and obligations of the bond issuer and the bond holders is called the

bond indenture.

The major issuers of bond market securities (borrowers) are

corporations and governments.

The spread measures the return premium a bond earns to compensate the investor for _______, _______ and ________.

default risk; liquidity risk; special bond provisions

Treasury STRIPS are created by and sold to investors through

government securities brokers and dealers.

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _______ the price specified in the warrant.

greater than

For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______.

inflation-adjusted principal value; semiannual coupon rate

Bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market.

liquidity

International sovereign bonds have historically exhibited ________ in returns with U.S. and international stocks.

low correlation

With a _______ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner.

registered; coupon payments

Private placements of bonds are unregistered but there are restrictions on the _______ of the bonds.

resale

By legally documenting the rights and obligations of all parties involved in a bond issue; the bond indenture helps lower the ______ and ______ of the bond issue.

risk; interest cost

Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid.

risky; reduce

Debenture holders generally receive their promised payments only after all ________ debt holders have been paid.

secured

Debentures which are junior in their rights to both secured debt and regular debentures are called

subordinated debentures.

The only protection to creditors under the doctrine of sovereign-immunity is threat of _______ and a lowering of the _______.

the loss of credibility; country's sovereign debt rating

With firm commitment underwriting, the _______ assumes the risk that the entire bond issue might not be sold.

underwriter

The characteristics of international bond markets are that bonds are (choose four)

- offered to investors in different countries. - offered in unregistered form. - traded outside the jurisdiction of any single country. - underwritten by an international syndicate.

The initial primary market sale for municipal bonds occurs through which of the following methods?

A public offering using an investment bank as underwriter, and A private placement to a small group of investors

The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was

Detroit.

For a callable bond, the difference between the face value of the bond and the call price paid is the

call premium.

Many corporate bond issues include a _______ in their indentures which allows the issuer to require the bond holder to sell the bond back to the issuer at a set price above the par value of the bond.

call provision

Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities.

changes in the attractiveness

The biggest issuers of debt in the global debt markets from 1996 through 2018 were

corporations and financial institutions.

The major purchasers of bond market securities (investors) are

corporations. households. governments. foreign investors.

Most bonds are ______ debt instruments.

coupon paying

Individual rules and restrictions within the bond indenture are referred to as

covenants.

Bond ratings provide investors with a ranking of the ________ of a bond issue.

default risk

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.

The semiannual coupon paid on TIPS securities is based on the _______ and so ________ from period to period.

inflation-adjusted principal; may vary

Interest rates on all bonds are affected by _______ and _______, which is typically measured using Treasury security rates.

inflation; the real risk-free rate

Certain institutional investors are prohibited by state and federal law from investing in bonds that are below ________, called _______ due to their risk.

investment grade; junk bonds

Sovereign debt issued by lesser developed countries tends to have a ______ credit rating due to increased _______ risks.

lower; economic and political

For all three bond rating agencies, ______ risk results in a ______ bond rating.

lower; higher higher; lower

For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______.

principal value; inflation

Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond.

stock warrants

Foreign bonds issued in the U.S. are called ______ bonds while foreign bonds issued in the U.K. are called _______ bonds and foreign bonds issued in Japan are called _______ bonds.

Yankee; Bulldog; Samurai

Bond markets are traditionally classified into three types, which are (choose three)

Treasury notes and bonds, municipal bonds, and corporate bonds.

True or false: Stock warrants may be detached from the underlying bond and sold separately to another investor.

True