Quiz 2: True/False
Subordinated debt will generally have a lower rate of return than senior debt.
False
A 20-year original maturity bond with 1 year left to maturity has more interest rate risk than a 10-year original maturity bond with 1 year left to maturity (assume that the bonds have equal default risk and coupon rates).
False
A bond that sells at a premium over par will have a current yield that is greater than it's coupon rate.
False
A bond was issued two years ago. It has a par value of $1000 and the coupon payments are $75 (paid annually). Today, the yield on the bond is 7.75%. This bond must be trading at a premium.
False
A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. Today the yield to maturity on the bond is 10% and has 8 years left until maturity. Today, the "current yield" for this bond will be less than 10%.
False
A bond's maturity value will generally be greater than it's par value
False
A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells) at par, therefore providing compensation to investors in the form of capital appreciation.
False
All else equal, more liquid bonds will have higher required rates of return.
False
All else equal, more liquid bonds will provide higher rates ofreturn.
False
All else equal, the existence of a protective covenant will increase the required rate of return on a bond.
False
All else equal, the riskier the bond, the greater the price.
False
An annuity due receives payments at the beginning of the period. This makes the future value of an annuity due equal to the future value of an ordinary annuity, plus the future value of an extra payment.
False
An annuity due receives payments at the beginning of the period. This makes the present value of an annuity due equal to the present value of an ordinary annuity, plus an extra payment.
False
An example of a protective covenant is a restriction that the company must keep the yield to maturity on thebond above a certain level.
False
An indenture is a bond secured only by the reputation of the issuing firm.
False
Bond rating agencies such as Moody's and Standard & Poor's attempt to measure the sensitivity of bond prices to changes in interest rates.
False
Bonds are referred to as floating rate bonds when their par values vary with inflation
False
Consider a coupon bond trading at a premium that initially matures in 10 years. Suppose 3 years go by (7 left to go) and now interest rates have fallen. The price today should be higher than it was 3 years ago.
False
Consider a zero coupon bond that initially matures in 10 years. Suppose 3 years go by (7 left to go) and now interest rates have risen. The price today should be lower than it was 3 years ago.
False
Consider two cash flows: $1,000 ten years from now, and $800 eight years from now. For all positive interest rates, the value today of the $800 (received in eight years) will be greater than the value today of the $1000 (received in ten years).
False
Consider two cash flows: $1,000 ten years from now, and $800 seven years from now. For all positive interest rates, in value today of the $800 (received in seven years) in will be greater than the value today of the $1000 (received in ten years).
False
Consider two identical callable bonds, except one bond has a sinking fund and the other bond does not. The bond without the sinking fund will have a higher price.
False
Even thougha bond has a substantial initial interest rate, its return can turn out to be negative if interest rates fall.
False
For bonds selling at a premium, the "yield to maturity" is greater than the "current yield."
False
If interest rates rise, firms are more likely to call in their callable bonds (assuming the bonds are not call protected).
False
If the rate of return on an investment is 50% per year, you will double your money in exactly 2 years.
False
If you borrow money from a bank through a compound interest loan, this means you earn interest on your interest payments, which effectively lowers the cost of the loan.
False
If you expect the inflation rate to be 3 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is approximately 10 percent.
False
If you expect the inflation rate to be 9 percent next year and a one-year bond has a yield to maturity of 6 percent, then the real interest rate on this bond is approximately 3 percent.
False
If you multiply a bond's current yield by its market price you will get the coupon rate.
False
If you multiply a bond's yield to maturity by its market price you will get the coupon rate.
False
In an amortized loan (like a car loan), the dollar amount of interest you pay each period stays fixed over the life of the loan.
False
In an amortized loan (like a car loan), the interest in dollars you pay each period stays fixed over the life of the loan.
False
In an amortized loan (like a house loan), the dollar amount of each payment that goes towards paying down the loan stays fixed over the life of the loan.
False
In an amortized loan (like a house loan), the fraction of each payment that goes towards paying down the loan stays fixed over the life of the loan.
False
Junk bonds are often referred to as high-yield bonds because they have lots of interest rate risk.
False
Moody's and Standard & Poor's evaluate the interest rate risk of bonds.
False
Municipal bonds are typically exempt from Federal income taxes. This raises their yield to maturity.
False
Pessimism about the economy could benefit U.S. Treasury bond yields.
False
Pessimism about the economy tends to increase Treasury bond yields.
False
Suppose you run a credit card company. When marketing your new monthly-compounded gold card, you would rather advertise the effective annual rate than the nominal annual rate.
False
The coupon payments on municipal bonds are exempt from Federal taxes. This raises the required rate of return on the bond.
False
The future value of an annuity due is equal to the present value of an equivalent ordinary annuity, multiplied by one plus the interest rate.
False
The future value of an ordinary annuity is equal to the future value of an equivalent annuity due, multiplied by one plus the interest rate.
False
The price of a AA rated bond will always be less sensitive to changes in interest rates than a BB bond.
False
The price of a BB rated bond will always be more sensitive to changes in interest rates than a AA ratedbond.
False
The term structure of interest rates describes changes in interest rates over time.
False
Treasury securities are considered riskless because investors can always sell the bonds back to the government at face value.
False
Treasury securities are considered riskless because investors can always sell the bonds back to the government at face value.
False
Treasury securities are considered riskless because their prices are not as sensitive to interest rates as corporate bonds.
False
Treasury securities are considered riskless because there is virtually no interest rate risk.
False
You have a choice between $750,000 today or an annuity payment of $50,000 at the end of each of the next twenty years. You are indifferent between the two choices when the interest rate is 2.91% (this is true). Atinterest rates above this level, you would pick the annuity.
False
You mom's retirement plan will pay her either $500,000 immediately on retirement or $700,000 five years after retirement. You should encourage her to choose the delayed payout.
False
You need money for tuition so you plan to sell some bonds from your portfolio. You have two types of bonds in your portfolio. The two types of bonds are identical except that X Bonds have a longer maturity than Y Bonds. If you think interest rates will fall soon after you sell your bonds (and stay there indefinitely), you would sell some X bonds.
False
Subordinated debt will have a higher required rate of returnthan senior debt.
True
Subordinated debt will tend to have a higher required rate of return than senior debt.
True
Suppose interest rates go down. For two otherwise similar bonds (same default risk, coupon, and maturity), a callable bond will likely increase less in price than a non-callable bond.
True
Bond ratings by Moody's and Standard and Poor's provide information on the likelihood of default
Tru
Bonds with longer maturities and/or lower coupons respond most vigorously to a change in market interest rates.
Tru
Consider two callable bonds. All else equal, the one with the longer call protection period will have a lower yield to maturity.
Tru
Consider two cash flows: $1,000 seven years from now, and $800 ten years from now. For all positive interest rates, in value today of the $1,000 (received in seven years) in will be greater than the value today of the $800 (received in ten years)
Tru
Subordinated debt will have a higher required rate of return than senior debt.
Tru
The Fisher effect describes the relationship between nominal returns, real returns, and inflation. As a close approximation, the nominal rate of return is equal to the real rate plus the expected rate of inflation
Tru
The market price of 20-year bond is currently equal to par value. If 5 years go by and interest rates remain the same, the bond will still sell at par value.
Tru
A 10-year bond is currently selling at a premium. If one year passes and the yield to maturity on the bond stays the same, the new price will be less than the price one year ago
True
A bond was issued two years ago. It has a par value of $1000 and the coupon payments are $70 (paid annually). Today, the yield on the bond is 7.25%. This bond will be trading at a discount.
True
A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. Today the bond sells for $1,000 and has 8 years left until maturity. Today, the current yield and coupon rate for this bond are equal to 10%.
True
A bond with an annual coupon of $100 originally sold at par for $1000. The current market interest rate on this bond is now 9%. Assuming no change in risk, this bond will now sell at a premium.
True
A call provision allows a company to retire its debt early for a specified price.
True
A debenture is secured only by the reputation of the issuing firm.
True
A sinking fund is an account into which periodic payments are made for the purpose of retiring a bond issue.
True
APRwill always be less than or equal to the effective annual rate.
True
All else equal, a more liquid bond will have a lower yield.
True
All else equal, the existence of a call provision will increase the required rate of return on a bond.
True
All else equal, the riskier the bond, the lower the price.
True
An example of a bond covenant is restrictions on the issuer's ability to take on additional long-term debt.
True
An example of a bond covenant is that the company must avoid dividend payments in excess of its debt expense.
True
An example of a plausible negative bond covenant is that the company must avoid dividend payments in excess of its debt expense.
True
An example of a plausible negative bond covenant is that the company must avoid dividend payments in excess of its debt expense.
True
Bonds are referred to as floating rate bonds when their coupon payments fluctuate with market rates.
True
Bonds are referred to as floating rate bonds when their coupon rates fluctuate with market interest rates.
True
Bonds are referred to as floating rate bonds when their yields fluctuate with market rates.
True
Consider a zero coupon bond that initially matures in 10 years. Suppose 3 years go by (7 left to go) and now interest rates have fallen. The price today should be greater than it was 3 years ago.
True
Consider these three bonds: (X) 8% coupon, 10 years to maturity, (Y) 10% coupon, 10 years to maturity, (Z) 10% coupon, 20 years to maturity. All else equal, Bond (Y) would most likely have the least interest rate risk.
True
Consider these three bonds: (X) 8% coupon, 10 years to maturity, (Y) 10% coupon, 10 years to maturity, (Z) 8% coupon, 20 years to maturity. All else equal, Bond (Z) would most likely have the most interest rate risk.
True
Consider these three bonds: (X) 8% coupon, 10 yearsto maturity, (Y) 10% coupon, 10 years to maturity, (Z) 10% coupon, 20 years to maturity. All else equal, Bond (Y) would most likely have the least interest rate risk.
True
Consider these three bonds: (X)8% coupon, 10 years to maturity, (Y) 10% coupon, 10 years to maturity, (Z) 10% coupon, 20 years to maturity. All else equal, Bond (Y) would most likely have the least interest rate risk.
True
Consider two bonds issued by the same company with the same maturity date. Bond X has several protective covenants, but bond Y has none. If the market price of the two bonds is the same,bond Y must have a larger coupon rate than bond X.
True
Consider two cash flows: $800 ten years from now, and $1000 eight years from now. For all positive interest rates, in value today of the $1000 (received in eight years) will be greater than the value today of the $800 (received in ten years).
True
Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.
True
Even though a bond may have a substantial coupon rate, its realized return can turn out to benegative if interest rates rise.
True
Firms are more likely to call their bonds when interest rates fall.
True
For a consul (perpetuity) bond, the "current yield" and "yield to maturity" will be the same.
True
If a firm remains financial healthy, its bonds will typically provide higher returns than government bonds
True
If interest rates fall, firms are more likely to call in their callable bonds (assuming the bonds are not call protected).
True
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is approximately -8 percent.
True
If you multiply a bond's "current yield" by its price, you get the coupon payment.
True
In a conventional mortgage, the percentage of the monthly payment that goes towardthe principal increases each month.
True
In an amortized loan (like a car loan), the fraction of each payment that goes towards reducing the loan amount increases over time.
True
Insurance companies are one type of investor who might find STRIPS more convenient than coupon bonds.
True
Municipal bonds tend to have lower coupon rates than similarly rated corporate bonds.
True
Pessimism about the economy could benefit Treasury bond prices.
True
Prices of zero-coupon bonds generally rise as maturity nears.
True
Suppose you run a bank. When marketing rates on quarterly-compounded savings accounts, you would rather advertise the effectiveannual rate than the nominal annual rate.
True
Switching from annual compounding to quarterly compounding will have a bigger impact on the effective annual rate than from quarterly to monthly compounding.
True
The Fisher effect describes the relationship between nominal returns, real returns, and inflation. As a close approximation, the real rate of return is equal to the nominal rate minus the expected rate of inflation.
True
The coupon payments from Municipal bonds are exempt from Federal income taxes.
True
The future value of an ordinary annuity is equal to the future value of an equivalent annuity due, divided by one plus the interest rate.
True
The future value ofa perpetuity is infinite.
True
The nominal and effective annual rates will be the same if interest is compounded annually.
True
The present value of an ordinary annuity is equal to the present value of an equivalent annuity due, divided by one plus the interest rate.
True
The price of one share of preferred stock in IBM is $121.52. If the required rate of return does not change, in two years the value of the preferred stock will be $121.52.
True
The relation between time to maturity and nominal interest rates on default-free, zero coupon bonds is referred to as the term structure of interest rates. It's usually upward sloping.
True
The term structure of interest rates is a plot of interest rates for different investment (or borrowing) horizons at a given point in time.
True
The written, legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is referred to as the indenture.
True
The yield to maturity for a premium bond is less than its coupon rate.
True
There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower.
True
Treasury securities are considered riskless because there is virtually no risk of default.
True
U.S. Treasury Notes and Treasury Bonds have original maturities greater than one year
True
U.S. Treasury TIPS bonds have coupon payments that vary with inflation, so their coupon rates can be thought of as real rates.
True
U.S. Treasury TIPS bonds have coupon payments that vary with the level of inflation.
True
U.S. Treasury TIPS have fixed coupon rates (as a percentage of par value), but their par values vary with inflation.
True
You have a choice between $1000 every year for ten years or $1680.58 every year for five years. You are indifferent between the two choices when the interest rate is 8% (this is true). At interest rates below this level, you would pick the ten year annuity.
True
You have a choice between $50,000 today or an annuity payment of $5,000 at the end ofeach of the next twenty years. You are indifferent between the two choices when the interest rate is 7.75% (this is true). At interest rates below this level, you would pick the annuity.
True
You have a choice between $750,000 today or an annuity payment of $50,000 at the end of each of the next twenty years. You are indifferent between the two choices when the interest rate is 2.91% (this is true). At interest rates below this level, you would pick the annuity.
True
You need money for tuition so you plan to sell some bonds from your portfolio. You have two types of bonds in your portfolio. The two types of bonds areidentical except that X Bonds have a higher coupon rate than Y Bonds. If you think interest rates will rise soon after you sell your bonds (and stay there indefinitely), you would sell some Y bonds.
True
Your broker offers you the opportunity to purchase a bondwith coupon payments of $90 and a face value of $1000. If the yield to maturity on similar bonds is 8%, this bond should sell at a premium.
True
The coupon payments on municipal bonds are exempt from Federal taxes. This raises the required rate of return on the bond.
alseF
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is approximately 8 percent.
laseF
In an amortized loan (like a house loan), the fraction of each payment that goes towards paying down the loan stays fixed over the life of the loan.
lseFa
For a consul (perpetuity) bond, the "current yield" and "yield to maturity" will be the same.
rueT