Financial Institutions Chapter 6

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

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

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

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

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

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

institutional investors; large investors

Bonds backed by insurance will have the credit rating of the ______ and a substantially ______ interest rate than if uninsured.

insurer; lower

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

semiannual coupon payments; repayment of principal

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year in the last two years.

$1,000,000; $200,000

The minimum denomination for municipal bonds is typically

$5,000.

Treasury notes have original issue maturities from over _____ to _____ years.

1; 10

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

Detroit

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

a bond; a Treasury security of similar maturity

Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security.

a percentage; face value

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

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

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

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.

assets

A sinking fund provision is _______ to investors, so bonds with a sinking fund provision generally have _______ yields than bonds without.

attractive; lower

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

bearer; coupons

With ________ underwriting, the investment bank makes no guarantees but acts as a placing or distribution agent for the bonds and collects a fee.

best efforts

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

bond indenture.

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.

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 dirty price for a Treasury note or bond is the sum of the ______ plus the _______.

clean price; accrued interest

In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest.

clean price; does not

A bond that can be exchanged for another security of the issuing firm is called a(n)

convertible bond.

The major purchasers of bond market securities (investors) are

corporations. households. governments. foreign investors.

When an investor buys a Treasury note or bond between coupon payments, the buyer must compensate the seller for any portion of the ______ that has ______ between the last coupon payment and the settlement date.

coupon payment; accrued

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.

coupon rate; face value

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

covenants.

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

default risk; liquidity risk; special bond provisions

The stop-out yield for a Treasury bill auction is the _______ assigned to the issue, while the stop-out yield for a Treasury note or bond auction is the _______ for the issue.

discount yield; yield to maturity

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.

exceeds; convert and take a profit does not exceed; not convert

Two types of municipal bonds exist: _______ and _______ bonds.

general obligation; revenue

The major issuers of bond market securities (borrowers) are

governments. corporations.

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

Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ______ interest rates paid on publicly placed issues.

higher than

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

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

inflation-adjusted principal value; semiannual coupon rate

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

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

informs the bondholders; initiates legal action

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

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

issuing firm

Issuers of privately placed bonds tend to be _______ than public issuers.

less well known

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

liquidity

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

low

Due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.

lower than

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.

Some corporate bonds and most ______ bonds are ______ bonds, meaning that the bond issue contains many maturity dates with a portion of the principal being paid off on each date.

municipal; serial

The price of a STRIP security is the ________ of the face value of the STRIP discounted using the _________ and ________.

present value; yield to maturity; semiannual compounding

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

principal value; inflation

A sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank and without SEC registration is called a(n)

private placement.

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

Bonds that are issued to finance a specific revenue-generating project and whose payments are made from those revenues are called _______ bonds.

revenue

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

Municipal bonds pay coupons

semiannually.

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

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

The coupon rate for a Treasury note or bond is determined by rounding the _______ down to the nearest ______ percent.

stop-out yield; 0.125

The bonds which are considered to be the riskiest and pay the highest yields are

subordinated debentures.

Because general obligation bonds rely upon tax revenues for repayment, ______ is usually required.

taxpayer approval

Most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date.

term

Most secondary bond market trades are carried out on ______ including virtually all _______ transactions.

the OTC market; large

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

the economy.

The two secondary markets for the trading of corporate bonds are ______ and ______.

the exchange market; the OTC market

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.

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

the national debt; other government expenditures

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

time preference for funds; maturity date

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

If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is _____.

Ra = Rb(1 - T)

All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.

Ra/(1 - T)

Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds.

TIPS

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

True

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year for families in the last two years.

$1,000,000; $300,000

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

$1,000; semiannually

The components of a Treasury STRIP are issued to investors in minimum denominations of ______ or in multiples of ______.

$100; $100

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

False

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

True