sample questions ch.16 (9-3)
A(n) ________ corporate bond will pay a ________ return. A) lower-rated; higher B) higher-rated; higher C) lower-rated; lower D) unrated; lower
A
The ________ is the amount returned to the investor at the maturity date when the bond is due. A) principal B) interest gain C) capital gain D) terminal value
A
The risk that you will be forced to sell your bond back to the issuer prior to maturity is the A) call (prepayment) risk. B) default risk. C) interest rate risk. D) political risk.
A
When you select bonds based on the expectation that interest rates will decline, you are using a(n) ________ strategy. A) interest rate B) maturity matching C) passive rate D) active rate
A
________ bonds are the least risky of all bonds and, therefore, pay a lower rate of interest. A) Treasury B) Municipal C) Federal agency D) Corporate
A
________ bonds do not contain a risk premium because they are free from default risk. A) Treasury B) Municipal C) Corporate D) City
A
If a bond's price is lower than the principal amount, its yield to maturity will be ________ the coupon rate. A) less than B) more than C) equal to D) no relation to
B
If a bond's value rises above its face value during its life, interest rates have A) increased. B) decreased. C) stayed the same. D) there is no relationship between bond prices and interest rates
B
If a company anticipates a substantial decline in interest rates in the future, which of the following is it likely to include in a bond? A) Par value B) Call feature C) Convertibility D) Reverse dividend
B
If you are concerned that market interest rates may risk in the near and intermediate term, your bond investment strategy should be to A) buy only junk bonds. B) buy bonds with shorter term maturities to minimize interest rate risk. C) buy bonds with long maturities to limit interest rate risk. D) exit bond investments and buy equities.
B
If you buy a corporate bond for $970 and sell it six months later for $1,050, you will have A) interest income of $80. B) a short-term capital gain of $80. C) a long-term capital gain of $80. D) nontaxable income of $80.
B
Investors purchase corporate bonds because A) they are a risk-free investment. B) they pay interest income. C) they pay dividends. D) the returns are higher than the returns from stocks.
B
Municipal bonds tend to have a ________ coupon rate than Treasury bonds issued at the same time; however, municipal bonds usually offer a(n) ________ after-tax return to investors. A) higher; lower B) lower; higher C) higher; higher D) lower; equal
B
The ________ is an additional return beyond the risk-free rate that investors require to compensate them for the additional risk. A) additional premium B) risk premium C) specific return D) nominal return
B
The advantage of a convertible bond to the investor is A) higher coupon interest rates. B) ability to "own the upside" if the company performs well. C) convertibility protects the investor if the stock decreases in value. D) none of these are advantages
B
The return on bonds currently held will be more favorable if interest rates ________ over the period you hold the bonds. A) increase B) decrease C) fluctuate D) remain the same
B
Which of the following bond ratings represents a high-quality risk class? A) Baa B) Aa C) Ba D) C
B
Which of the following is not a characteristic of corporate bonds? A) Have different ratings B) Are long-term equity securities C) Subject to default risk D) Not backed by the federal government
B
Which of the following is not always a true statement? A) The par value of a bond is its face value. B) The par value of a bond is its market value. C) The par value of a bond will be paid to the bondholder at maturity. D) The par value multiplied by the coupon rate equals the interest paid to investors annually
B
Which of the following statements is not true regarding municipal bonds? A) They are issued by state and local governments. B) They are free from the risk of default. C) The interest is exempt from federal income taxes. D) The interest is exempt from state taxes if the investor resides in the state where the bond was issued
B
You should consider investing in bonds rather than stock if you A) are willing to take more risk. B) wish to receive income from your investment. C) are willing to tie up your investment for a long period. D) think interest rates will increase significantly in the near future.
B
________ bonds are issued by state and local government agencies. A) Treasury B) Municipal C) Federal agency D) Corporate
B
If a company's stock price is expected to increase substantially over the next few years, which of the following may entice potential bondholders to accept a lower coupon rate on the company's bonds? A) Par value B) Call feature C) Convertibility D) Reserve feature
C
Investing in bonds gives you the possibility of all of the following except A) having a capital gain. B) losing your investment if the company goes bankrupt. C) receiving dividends. D) receiving the face value at maturity
C
Investors are willing to purchase bonds with a call feature only if the bonds offer a(n) A) slightly lower return than similar bonds without a call feature. B) slightly higher number of shares of the issuer's stock. C) slightly higher return than similar bonds without a call feature. D) extraordinary return similar to an IPO.
C
Municipal bonds are most beneficial for investors who A) reside in a different state from the municipality that issued the bonds. B) are in a low tax bracket. C) are in a high tax bracket. D) qualify for the earned income credit
C
On the secondary bond market, A) only new bonds can be sold. B) bonds are guaranteed to bring at least par value. C) bond prices vary with interest rate movement and other factors. D) bonds usually take several days to sell.
C
The ________ is the stated interest rate of the bond at the time it was issued. A) effective rate B) yield C) coupon rate D) IRR
C
The ________ strategy is intended to generate periodic and stable interest income. A) interest rate B) maturity matching C) passive D) active
C
The relationship between a bond's price and the yield to maturity A) changes at a rate equal to the change in yield. B) is linear. C) is inverse. D) is relative.
C
When a bond has a call feature, the investor should consider the ________ when deciding whether to invest in the bond if it is not selling at par value? A) convertibility provision B) interest rate C) yield to call D) yield to maturity
C
Which of the following features of a bond could result in the company never paying out cash to redeem the bonds? A) Par value B) Call feature C) Convertibility D) Yield to maturity
C
Which of the following is a characteristic of corporate bonds? A) Rated on a scale from AAAA to FFFF B) Used to finance debt over a short period such as six months C) Issued as long-term debt securities D) Exempt from state tax in the state where the issuing company has its headquarters
C
Which of the following is not a characteristic of Treasury bonds? A) Long-term debt securities B) Issued by the U.S. Treasury C) Exempt from federal tax D) Highly liquid
C
Which of the following issuers' bonds would be subject to both federal and state income taxes? A) City of Chicago B) Saline, Michigan School District C) Apple, Inc. D) U.S. Treasury
C
Which of the following statements is not true of corporate bonds? A) They are debt securities issued by large companies. B) They have long-term maturity dates. C) They are very secure and almost never default. D) They can offer a predictable source of income.
C
Some ________ bonds are called junk bonds, which have a high level of risk. A) Treasury B) Municipal C) Federal Agency D) Corporate
D
The coupon rate of interest on a bond is always stated as a(n) A) daily rate. B) monthly rate. C) semiannual rate. D) annual rate.
D
The present value of a bond can be computed by discounting the ________ to be received from the bond. A) capital gains B) required rate of return C) tax benefits D) future cash flows (coupon and principal payments)
D
The secondary market price of a bond is based on A) the bond's coupon payments. B) the number of years the bond has until maturity. C) the market interest rate required for bonds of a similar risk and term. D) All of the above are factors in determining the bond's market price.
D
Which of the following does not influence a bond's yield to maturity? A) Call risk B) Interest rate risk C) Firm's risk D) Historic yields to maturity
D
Which of the following is not a reason investors purchase bonds? A) Conservative investment B) Pay periodic income C) May be convertible D) Have high risk and return
D
Which of the following tax effects could not occur with the purchase and sale of a corporate bond? A) Capital gain B) Capital loss C) Interest is taxed at ordinary rates. D) Interest is not taxable
D
Which of the following tax implications will result from selling your bonds at a lower price than what you paid for them eight months ago? A) You have a short-term capital gain taxed at your ordinary income tax rate. B) You have a long-term capital gain subject to capital gains tax. C) You have a long-term capital loss. D) You have a short-term capital loss
D
A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period
FALSE
An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity
FALSE
As interest rates rise, the market price of your bond is also likely to rise.
FALSE
Because convertibility is a desirable feature for investors, convertible bonds tend to offer a higher return than nonconvertible bonds
FALSE
Bonds are equity investments issued by corporations or government agencies.
FALSE
Bonds are issued with a callable feature when the issuers expect interest rates to rise
FALSE
Generally, bonds have maturities between 10 and 30 years and pay interest annually
FALSE
If you expect interest rates to rise over time, you should consider investing in bonds with longer maturities.
FALSE
Municipal bonds are those issued by the U.S. Treasury Department for the benefit of cities and states
FALSE
The interest received from U.S. Treasury bonds is exempt from federal, state, and local income taxes.
FALSE
To completely avoid the risk of default, investors can invest in Treasury bonds or A-rated corporate bonds.
FALSE
When a bond has a par or face value of $1,000 and a 6% coupon rate, the semiannual payment would be $60.
FALSE
A bond's par value or face value is the amount the investor will get paid when the bond matures
TRUE
A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured
TRUE
A call feature on bonds allows the issuer to buy back the bonds from investors before the maturity date
TRUE
A passive strategy of bond investing consists of buying bonds for the long term and not selling them until maturity.
TRUE
Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature
TRUE
Bonds with longer maturities are more sensitive to interest rate movements than bonds that have shorter maturities.
TRUE
During their lifetime, bonds can be sold for more or less than their face value depending on the demand for these particular bonds
TRUE
Figuring the present value of future coupon payments, along with the present value of the principal payment, is a good way to determine the value of a bond
TRUE
If you want to receive periodic income from your investments, you should consider investing in bonds rather than stocks.
TRUE
Junk bonds offer a relatively high rate of return, but they are more likely to default than other bonds
TRUE
Since municipal bond interest is exempt from federal income tax, it is especially beneficial to high-income investors
TRUE
The maturity matching strategy involves selecting bonds that will generate payments to match future expenses.
TRUE
The risk premium of bonds is the amount by which their annualized yield exceeds the Treasury bond yield
TRUE
Bonds with a ________ degree of default risk are most susceptible to default when economic conditions are ________. A) low; strong B) high; weak C) high; strong D) low; weak
B
Callable bonds are issued when interest rates are expected to A) stay the same. B) decline. C) rise. D) None of the above
B
Convertible bonds tend to offer a(n) ________ return than nonconvertible bonds. A) higher B) lower C) similar D) indexed
B
A bond's yield to maturity is above its coupon rate when A) the bond's market price is above par value. B) the bond's market price is below par value. C) the bond is convertible and the stock has appreciated. D) interest rates are lower than the prime rate.
B
All bonds are subject to the following risks except A) default risk. B) call risk. C) interest rate risk. D) impact of economic conditions.
B
All of the following may be a feature of a bond, except A) convertible. B) dividends. C) tax-free. D) callable.
B
As interest rates go up, bond prices A) also go up. B) go down. C) remain the same. D) may go up or down.
B
Bonds that may be exchanged for common stock when the stock reaches a specified price are called A) options. B) convertible bonds. C) callable bonds. D) stock bonds.
B
Bonds usually pay interest A) annually. B) semiannually. C) quarterly. D) monthly.
B
A ________ feature on a bond allows the issuer to buy back the bond from the investor before maturity. A) convertible B) dividend C) call D) recall
C
A corporate bond with a rating below ________ is considered to be a junk bond? A) AAA B) A C) BBB D) B
C
Bonds with ________ terms to maturity are ________ sensitive to interest rate movements than bonds that have short terms remaining until maturity. A) middle; less B) longer; less C) longer; more D) longer; equally
C
You own a $1,000 par value convertible bond with a 6% coupon rate. The bond is convertible into 20 shares of stock at the investor's discretion. The stock price has reached $51 per share with a $1 per share annual dividend, but you do not forecast any further price appreciation in the stock. Should you make the conversion? A) No, 20 shares of stock are not worth $1,000. B) Yes, since the stock is worth $51 per share it is worth more than the bond. C) No, the total stock is only worth $20 more than the bond, and you would lose $40 in annual cash flow based on the coupon rate versus the dividend. D) Yes, while the stock is only worth $20 more in total than the bond, you will receive an annual $1 per share dividend.
C
Your son will be ready for college in 10 years and your daughter in 15. Which of the following bond strategies would be best suited to your goal of financing your children's education? A) Interest rate B) Passive C) Maturity matching D) Active
C
A bond from Ginnie Mae is an example of a bond issued by A) a corporation. B) the U.S. Treasury. C) a municipality. D) an agency of the federal government
D
Another name for high-yield bonds is A) corporate bonds. B) federal agency bonds. C) T-bills. D) junk bonds
D
Corporate bond quotations in the daily financial newspapers include all of the following, except A) coupon rate and volume. B) maturity and closing price. C) current yield and net change from the previous day. D) original face value of the bond.
D
Federal agency bonds are all of the following except A) issued by government agencies or government-sponsored entities. B) have a very low degree of default risk. C) issued by Ginnie Mae, Freddie Mac, and Fannie Mae. D) exempt from all taxation.
D
If you build your financial and investment plan with a focus on safety and security you should probably avoid A) small cap equities. B) junk bonds. C) BB rated municipal bonds. D) all of the above should be avoided.
D
If you purchased a 6% bond at par value and sold it 12 months plus 1 day later for $1100, the taxable income you would have realized over the two year period is A) $100 long term capital gain. B) $160 ordinary income gain. C) $60 ordinary income and $100 short term capital gain. D) $60 ordinary income and $100 long term capital gain.
D
