Chapter 12A Fin 407
A 10-year bond that has a 12% coupon and is currently selling for $1,200 will have a current yield of A. 10% B. 11% C. 12% D. 14%
A
Which of the following statements regarding bond characteristic is(are) CORRECT? I. A call provision gives the bond issuer the right to retire the issue by paying off the obligation. II. Exercising the call provision becomes attractive to the bond issuer when market interest rates risk sufficiently above the coupon rate on the outstanding bonds and, as a result, the issuer saves money. A. I only B. II only C. Both I and II D. Neither I nor II
A
Which of the following statements regarding the valuation of securities is(are) CORRECT? I. For bonds, the valuation process is fairly simple because the returns are known and the risk can be approximated from the currently available data. II. Interest rates are the primary factor affecting bond prices, and changes in interest rates can be effectively forecasted. A. I only B. II only C. Both I and II D. Neither I nor II
A
All of the following statements regarding corporate bond are correct EXCEPT A. The typical corporate bond matures in 20 to 40 years, pays semiannual interest, is callable, carrie a sinking fund, and is sold originally at a price close to par value. B. Because corporate bonds carry default risk, corporation have created bond-rating agencies to render judgments on the relative merits of their securities. C. Corporate bonds are senior securities- that is, they are senior to both the preferred and common stock of a corporation in terms of priority of payment and in case of bankruptcy and liquidation. D. Debenture are unsecured bonds backed by the overall financial soundness of the issuing firm
B
What is the value of a 3-year bond with $1,000 par value that pays an 8% coupon semiannually if comparable bonds are currently yielding 12%? A. $671.09 B. $901.65 C. $1,054.17 D. $1,098.35
B
What is the yield to maturity for a 10-year zero-coupon bond selling for $461.92 A. 3.94% B. 7.87% C. 8.03% D. 8.35%
B
Which of the following statements regarding a bond's valuation is(are) CORRECT? I. Bond are valued using a present value process. The cash flows for a bond-interest payments and principal repayments-are discounted at the bon'd requiring yield. II. Without regard to other factors, the price of a bond will generally change over time because it must be worth the par value on the maturity date. A. I only B. II only C. Both I and II D. Neither I nor II
C
Which of the following statements regarding a bond's valuation is(are) CORRECT? I. Bonds prices move inversely with interest rates, which price increasing(decreasing) as the required yield decreases (increases). II. Bond price volatility is direct related to time to maturity and inversely related to bond coupon payments. A. I only B. II only C. Both I and II D. Neither I nor II
C
Which of the following statements regarding bond yield measurements is(are) CORRECT? I. Current yield is a bond's annual coupon payment divided by the current market price. II. Yield to maturity (YTM) is the expected compounded rate or return an investor will receive from a bond purchased at the current market price and held to maturity. A. I only B. II only C. Both I and II D. Neither I nor II
C
Which of the following statements regarding bond yield measurements is(are) CORRECT? I. Interest on interest is the process by which bond coupon payments are reinvested to earn interest. II. Reinvestment rate risk results from uncertainty about the rate at which future coupon payments can be reinvested. A. I only B. II only C. Both I and II D. Neither I nor II
C
Which of the following statements regarding the concept of bond duration is(are) CORRECT? I. Duration is the weighted average time to recovery of all interest payments plus principal repayment. II. Duration expands with time to maturity, but at a decreasing rate and is inversely related to the coupon rate and yield to maturity. A. I only B. II only C. Both I and II D. Neither I nor II
C
Which of the following statements regarding the term structure of interest rate is(are) CORRECT? I. Term structure of interest rates refers to the relationship between time to maturity and yields for a particular category of bonds at a particular point in time. II. The term structure is usually plotted in the form of a yield curve, which is a graphical depiction of the relationship between yields and maturities for bonds that are otherwise identical. A. I only B. II only C. Both I and II D. Neither I nor II
C
All of the following statements regarding bond characteristics are correct EXCEPT A. The typical bond matures (terminates) on a specified date and is technically known as a term bond B. Typically, coupon bonds pay interest semiannually C. A bond sold with no coupons, at a discount, and redeemed for face value at maturity is called a zero-coupon bond D. The lower the price paid for a coupon bond, the lower the effective return.
D
All of the following statements regarding bonds are correct EXCEPT A. U.S. Treasury bonds offer investors a steady stream of interest payments and the assurance of receiving the par value of the bonds at maturity. B. Collateral trust bonds are usually secured by stocks and bonds of other companies held in trust. C. Municipal bonds are securities issued by political entities, other than the federal government and its agencies, such as stated and cities. D. Two basic type of government agency securities are general obligation bonds, which are backed by the full faith and credit of the issuer, and revenue bonds, which are repaid from the revenues generated by the project they were sold to finance.
D
All of the following statements regarding term structure theories of bond analysis are correct EXCEPT A. The expectations theory states that the long-term interest rate is equal to an average of the short-term rates that are expected to prevail over the long-term. B. The liquidity preference theory states that interest rates reflect the sum of current and expected short-term rates, as in the expectations theory, plus liquidity (risk) premiums, C. The preferred habitat theory states that investors have performed maturity categories which they seek to invest but are willing to shift to the other maturities if they expect to be adequately compensated. D. The market segmentation theory states that investors divide their activities between specific maturity categories but are prone to shifting from one category to another to take advantage of opportunities.
D
All of the following statements regarding the bond market are correct EXCEPT A. A wide range of investors is interested in bonds, ranging from those who seek a steady stream of interest income and return of principal to those seeking capital gains by speculating on future interest rate movements. B. The relationship between bond yields and inflation may be more important for investors to understand than the relationship between bond yields and economic growth. C. If investors expect a rise in inflation, they demand more than a bond to compensate them for the expected decline in the purchasing power of their cash flows from the bond investment. D. An increase in expected inflation will tend to increase bond prices and decrease yields.
D
All of the following statements regarding the concept of bond duration are correct EXCEPT A. The calculation of duration depends on three factors: final maturity of the bond, coupon payments, and yield to maturity. B. Holding the size of coupon payments and the yield to maturity constant, duration expands with time to maturity but at a decreasing rate, particularly beyond 15 years to maturity. C. Holding maturity and yield to maturity constant, the coupon rate is inversely related to duration. D. Holding coupon payments and maturity constant, yield to maturity is directly related to duration.
D
Which of the following statements regarding fixed-income securities are correct EXCEPT A. Fixed-income securities are a principal type of capital market security typically owned directly by individual investors. B. All fixed-income securities have a specified payment schedule. C. Bonds are long-term debt instruments representing an issuer's contractual obligation. D. If the buyer of a bond decides to sell the bond before maturity, the price received will depend on the level of interest rates at the time of original purchase.
D
Which of the following statements regarding money market securities is(are) CORRECT? A. Money markets include short-term, highly liquid, relatively low-risk debt instruments sold by governments, financial institutions, and corporations to investors. B. Investors may invest daily in money market securities. C. Treasury bills are an example of a money market security and are used as a benchmark asset because of their risk-free nature. D. All of these.
D
As a a type of systematic risk, purchasing power risk can be eliminated through diversification.
F
As with most financial securities, the value of a bond is equal to the future value of the expected cash flows.
F
Asset-backed securities, such as mortgage-back securities and collateralized mortgage obligations, contain less uncertainty with regard to their cash flows than U.S. Treasury bonds
F
Bonds with higher coupon rates are less stable with respect to interest rate changes than bonds with lower coupon rates.
F
Bonds with higher durations are less volatile than bonds with lower durations when interest rates change.
F
Bonds with longer terms are subject to less volatility than bonds with shorter terms when interest rates change.
F
Commercial paper consists of a private sector company's issue of long-term, secured promissory notes.
F
Debt obligations provide corporations with a method of raising needed capital funds while diluting the ownership of the entity.
F
Fixed-income securities are subject to interest rate risk, reinvestment rate risk, purchasing power risk, and default risk.
F
Fortunately, default risk is a systematic risk that can be eliminated (or at least minimized) through the choice of investment and diversification.
F
From the investor's viewpoint, the best time for a company to redeem a bond issue is when interest rates have declined.
F
If the reinvestment rate is greater than the yield to maturity, the actual yield earned on the bond will be less than the calculated yield to maturity.
F
Immunization is the concept of maximizing the effect of changes in interest rates on the value of investments.
F
Only bonds with a CCC standard credit rating or lower by Standard and Poor's are considered non investment-grade bonds.
F
Series HH savings bonds could only be acquired through an exchange of Series I savings bonds.
F
The duration of a bond always exceeds the maturity of a bond.
F
The expectations theory is based on the concept that the short-term interest rate is based on expected future long-term interest rates.
F
The money market consists of securities that have the following characteristics: short-term maturity, low credit risk, and low liquidity.
F
The secondary market is the place where securities are first offered to the public.
F
Unlike other fixed-income obligations, MBSs are not subject to reinvestment rate risk.
F
A bond's maturity and its duration exhibit a direct relationship.
T
A call provision provides the issuer of the debt instrument the right to redeem the bond issue before maturity.
T
A tax benefit of Series EE savings bonds is that the interest earned on these securities can be completely excluded from taxable income if the proceeds are used for qualified higher education costs of the taxpayer, spouse, or dependents.
T
According to the liquidity preference theory, investors prefer certainty and expect to be rewarded or compensated for uncertainty.
T
Although relatively safe, municipal bonds are often insured by third-party insurance companies to further reduce credit risk.
T
Because of the popularity of the mortgage-backed securities, private investment firms have created their own pass-through securities, which are referred to as collateralized mortgage obligations (CMOs).
T
Bonds are used for the purpose of diversifying portfolios or providing income to individuals who are in need of a stream of cash flows.
T
Calculating the yield to maturity for a zero-coupon bond can be done using periodic payments of $0.
T
Convertible bonds are hybrid securities similar to option contracts that give the holder a right, not an obligation, to acquire shares of common stock from the issuing company by exchanging the currently held debt security.
T
Debenture holders are general creditors of the issuing corporation and will be paid in liquidation only after secured creditors have been repaid.
T
Duration provides investors with a method of easily comparing a bond's volatility to the volatility of other bonds.
T
Federal agency securities are public debt instruments issued by agencies of the U.S. government as means of raising funds for operations of the respective agency.
T
Interest rate risk is the risk that fluctuations in interest rates will adversely affect the value of a security.
T
Mortgage-back securities (MBSs) are often referred to as pass-through securities because the monthly mortgage payments are passed along to the holders of the MBSs.
T
Municipal bonds, which include bonds issued by municipalities such as states, countries, and cities, are part of the tax-exempt bond market.
T
Pretax yields on taxable instruments are generally higher than the yields for tax-exempt securities with similar risk.
T
Reinvestment rate risk is the risk that cash flows that occur during the holding period of an investment will not be able to be invested at a rate that is at least as great as the expected rate or return of the original investment.
T
The STRIPS (Separate Trading of Registered Interest and Principal of Securities) program permits investors to hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities.
T
The Series I savings bond earnings rate is a combination of two separate rates: A fixed rate of return and a semiannual inflation rate.
T
The bond indenture agreement is the legal document that sets forth the repayment schedules, restrictions, and promises between the issuer and the borrower.
T
The three important uses for duration are: providing a measure of a bond's volatility, estimating the change in the price of the bond on the basis of changes in interest rates, and immunizing a bond or bond portfolio against interest rate risk.
T
The three traditional strategies for immunizing bond portfolios from interest rate risk include the ladder strategy, the barbell strategy, and the bullet strategy.
T
The yield an investor will earn from a bond is determined by evaluating yields on similar instruments offered in the market.
T
There are several theories that attempt to explain the reason for the shape of the yield curve, including the pure expectations theory, the liquidity theory, the preferred habitat theory, and the market segmentation theory.
T
Treasury inflation-protection securities (TIPS) provide protection both from devaluation of principal and from loss of purchasing power.
T
Yield curves reflect current market interest rates for various bond maturities.
T
Yield to call (YTC) is the rate of return that equates the present value of the bond to the expected cash flows, adjusted from the timing of the call provision.
T
Yield to maturity (YTM) is the promised compound rate of return on a bond purchased at the current market price and held to maturity.
T
