FIN 3826 Chapter 10

C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

A. maturity at issue

11. The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

C. increasing both the par value and the coupon payment

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

D. A price-earnings ratio

13. You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio

B. II and III only

14. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

D. an increase in expected interest rate volatility

15. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

C. STRIPS

16. __________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C. puttable

17. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C. indexed bonds

18. TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

A. Eurobonds

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

D. junk bonds

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

B. BBB

22. Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B. a higher yield on long-term bonds than on short-term bonds

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

D. both bonds will decrease in value but bond B will decrease more than bond A

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

C. Preferred stock

25. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

C. inverse floaters

26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

C. Catastrophe

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset-backed bonds B. TIPS C. Catastrophe D. Pay-in-kind

D. a pay-in-kind

28. The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind

B. longer; lower

29. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

A. secured by other securities held by the firm

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

B. Invoice price = Flat price + Accrued interest

30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued interest B. Invoice price = Flat price + Accrued interest C. Flat price = Invoice price + Accrued interest D. Invoice price = Settlement price - Accrued interest

A. callable

31. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

D. Sinking fund

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

A. staggered maturity dates

33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

C. Coupon bonds selling at a premium

34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero-coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating-rate bonds

B. decrease

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

A. lower than

47. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

B. horizon analysis

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

D. unsecured

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

B. current yield

53. The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

B. A puttable mortgage bond

56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A puttable mortgage bond C. A callable mortgage bond D. A puttable debenture

B. 10-year maturity, selling at 100

57. A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

C. capital loss; capital gain

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

A. its coupon rate is greater than its yield to maturity

60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A. higher

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A. expected increases in inflation over time

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

D. I, II, and III

64. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

C. taxation

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

A. I and II only

67. A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

C. coupon rate

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

C. TIPS

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

A. shape of the bond price curve with respect to interest rates

9. In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

B. Decreased

90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. The answer cannot be determined from the information given.

A. indenture

91. The ___________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

C. secured by property owned by the firm

A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C. holder

Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

A. stated or flat price in a quote sheet plus accrued interest

The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price