Chapter 12- FIN
(I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment.
(I) is false, (II) true.
(I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors.
(I) is true, (II) false.
(I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
(I) is true, (II) false. (actually can't be redeemed "anytime" but after a specified time, go with it.)
The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is
10%.
The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is
12%.
(I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds.
B) (I) is false, (II) true. (capital markets include bonds, stock and mortgages p. 273 introduction)
(I) Securities that have an original maturity greater than one year are traded in money markets. (II) The best known money market securities are stocks and bonds.
Both are false.
(I) The primary issuers of capital market securities are financial institutions. (II) The largest purchasers of capital market securities are corporations.
Both are false.
(I) Callable bonds usually have a higher yield than comparable noncallable bonds. (II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.
Both are true.
(I) Firms and individuals use the capital markets for long-term investments. (II) Capital markets provide an alternative to investment in assets such as real estate and gold.
Both are true.
(I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.
Both are true.
(I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.
Both are true.
(I) Securities that have an original maturity greater than one year are traded in capital markets. (II) The best known capital market securities are stocks and bonds.
Both are true.
(I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.
Both are true.
(I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims.
Both are true.
(I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time, the issue is an initial public offering.
Both are true.
(I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.
Both are true.
(I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.
Both are true. (the indenture is the contract associated with a corporate bond. Corporate bonds usually contain call provision)
General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.
FALSE
Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date.
FALSE
Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk.
FALSE
Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
FALSE
The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.
FALSE
The primary issuers of capital market securities are local governments and corporations.
FALSE
The secondary market is where new issues of stocks and bonds are introduced.
FALSE
Which of the following are true for the current yield?
Only A and B of the above are true.
A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults.
TRUE
A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.
TRUE
Capital market securities are less liquid and have longer maturities than money market securities.
TRUE
Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.
TRUE
Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises.
TRUE
Governments never issue stock because they cannot sell ownership claims.
TRUE
In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.
TRUE
Most municipal bonds are revenue bonds rather than general obligation bonds.
TRUE
Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
TRUE
The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight.
TRUE
To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
TRUE
Which of the following are true for the current yield?
The current yield is defined as the yearly coupon payment divided by the price of the security.
Which of the following statements about Treasury inflation-indexed bonds is not true?
The principal amount used to compute the interest payment varies with the consumer price index.
Governments never issue stock because
They cannot sell ownership claims.
A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called
a sinking fund.
Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk.
above; interest-rate
A change in the current yield ________ signals a change in the same direction of the yield to maturity.
always
Bonds
are securities that represent a debt owed by the issuer to the investor.
The prices of Treasury notes, bonds, and bills are quoted
as a percentage of $100 face value.
The bond contract that states the lender's rights and privileges and the borrower's obligations is called the
bond indenture.
The security with the longest maturity is a Treasury
bond.
Capital market trading occurs in
both A and B of the above.
The distribution of a firm's capital between debt and equity is its
capital structure.
The ________ rate is the rate of interest that the issuer must pay.
coupon
The nearer a bond's price is to its par value and the longer the maturity of the bond, the more closely the ________ approximates the ________.
current yield; yield to maturity
Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called
debentures.
Financial guarantees
do all of the above.
Restrictive covenants can
do all of the above.
The ________ value of a bond is the amount that the issuer must pay at maturity.
face
Call provisions will be exercised when interest rates ________ and bond values ________.
fall; rise (if market rates fall, your bond, having a higher rate, would sell at a premium)
The largest purchasers of capital market securities are
households.
The first step in finding the value of a bond is to
identify the cash flows the holder of the bond will receive.
A firm will borrow long-term
if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt.
In its simplest form, a credit default swap provides
insurance against default in the principle and interest payments of a credit instrument.
Treasury bonds are subject to ________ risk but are free of ________ risk.
interest-rate; default
Compared to money market securities, capital market securities have
longer maturities.
The risk on an agency bond is
low.
Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.
lower; the bonds will be considered safer by buyers
Individuals and households frequently purchase capital market securities through financial institutions such as
only A and B of the above.
By the time the subprime financial crisis hit in force, Fannie and Freddie had ________ subprime and Alt-A assets on their books.
over $1 trillion of
When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.
premium; above
The primary reason that individuals and firms choose to borrow long-term is to
reduce the risk that interest rates will rise before they pay off their debt.
Policies that limit the discretion of managers as a way of protecting bondholders' interests are called
restrictive covenants.
The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt.
rise
To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.
risen; lower
Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds.
secured; general obligation (revenue bonds based on the revenue stream of a project, could default...G.O.s are based on the full faith and credit of the issuer)
The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value.
shorter; farther
A secured bond is backed by
specific collateral.
The primary issuers of capital market securities include
the federal and local governments, and corporations.
Corporations may enter the capital markets because
they do not have sufficient capital to fund their investment opportunities.
STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called
zero-coupon securities. (each interest and principle payment becomes a zero coupon bond)