Finance Chapter 6

Other things equal, investors will require higher yields on, and be willing to pay lower prices for, bonds with the following characteristics, except those which: A. Are unsecured B. Have less protective covenants C. Have lower credit quality D. Are convertible into common shares

D - Are convertible into common shares

T/F A "call provision" allows the bondholder the option to determine when they want the company to buy back the bond.

False

T/F A call provision in a bond allows the issuer to repurchase the bonds on the open market prior to

False

T/F A call provision in a bond limits the actions of the borrower.

False

T/F A call provision in a bond protects the borrower from unscrupulous practices by the lender.

False

T/F A callable bond can be swapped for a fixed number of shares of stock before maturity at the holder's option.

False

T/F A convertible bond initially sells at a deep discount and pays no interest payments.

False

T/F Companies are required by law to have their bonds rated by agencies such as Moody's or S&P.

False

T/F Interest rate risk premium represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected

False

T/F Investors require higher yields on secured bonds than on unsecured bonds.

False

T/F Liquidity premium represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected

False

T/F Over time as a bond's maturity grows closer, if it does not default and if market yields do not change, then the price of a discount bond will decrease.

False

T/F Taxability premium represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected

False

T/F The coupon rate on a previously issued bond represents the rate of return required by today's participants in the marketplace.

False

T/F The market prices of bonds with higher coupons are more sensitive to changes in market interest rates.

False

T/F Treasury Bonds are pure discount loans sold by the US government as a means to borrow money for less than one year.

False

T/F When a bond's yield to maturity is less than its coupon rate, the bond is selling at a discount.

False

T/F When market yields rise, investors redeem or 'call' the callable bonds they own, forcing the issuer of the bond to pay at least the face value.

False

T/F When yields increase, bonds with shorter maturities tend to decrease in value more than bonds with longer maturities.

False

T/F A bond's yield represents the annualized return that an investor would earn by holding it to maturity if it does not default.

True

T/F A call provision in a bond grants the issuer the option to repurchase the bonds prior to maturity at a pre-specified price.

True

T/F Default risk premium represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected

True

T/F If a bond is held to maturity and it does not default, then the reinvestment rate risk will offset the price risk.

True

T/F Over time, if yields do not change, the values of premium bonds decrease toward par smoothly.

True

T/F The Fisher effect is the relationship between nominal returns, real returns, and inflation.

True

T/F The invoice amount that an investor actually pays to purchase an outstanding bond is not its 'clean' quoted price.

True

T/F The market prices of bonds with longer maturities are more sensitive to changes in market interest rates.

True

T/F The yield to maturity is a bond's rate of return that is required by the market place.

True

T/F When a bond's yield to maturity is less than a bond's coupon rate, the bond is selling at a premium.

True

T/F When interest rates increase, then bond prices fall, and more so the longer their maturity and the smaller their coupons.

True

T/F When market yields rise, the price of bonds with small coupons fall by a greater percent than those with large coupons.

True

T/F When market yields rise, the price of discount bonds falls further below par or face value.

True

T/F When market yields rise, the price of long-term bonds falls by a greater percent than short-term bonds.

True