Chapter 5: Mastery Progress Exam

Réussis tes devoirs et examens dès maintenant avec Quizwiz!

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive:

$10,200

A customer buys two bonds, both have a par value of $1,000, and she pays 103 5/8 for each bond. The bonds are callable at 105. If the customer's bonds are called, she will receive:

$2,100 If the bonds are called the investor will receive 105% of the par value for each bond. $1,000 x 105% = $1,050; however, this is multiplied by two bonds for a total of $2,100.

An investor sells ten 5% bonds and buys another 10 bonds with a 5 1/4% coupon rate. The investor's yearly cash flow from the bonds will have increased by:

$2.50 per bond The investor's yearly return will have increased by $2.50 per bond. The increase is 1/4% (5% to 5 1/4%), which is 1/4 of 1% of the par value of $1,000, or $2.50.

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive:

$50,000 plus the last interest payment

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of:

$660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is:

4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

If a municipal bond has a basis of 5.25, and its coupon rate is 4 3/4%, the bond is selling:

Below par

Which of the following formulas is used to calculate the current yield on a bond?

Annual interest Current market value

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is:

7.60% The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels?

A discount

A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels?

A discount

A bond has a 5.5% coupon and is trading at a 4.65% basis. The bond is trading at which of the following price levels?

A premium

A bond has a 6% coupon and is trading at a 5.78% basis. The bond is trading at which of the following price levels?

A premium

If a bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at:

A premium

If a municipal bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at:

A premium

Which of the following is the lowest Moody's investment grade bond rating?

Baa

Which of the following is the lowest Moody's investment-grade bond rating?

Baa

Which of the following risks affects bonds primarily when interest rates decline?

Call risk

An outstanding municipal bond would most likely be called when interest rates:

Fall below the bond's nominal yield Bonds may contain a provision that allows the issuer, at its option, to redeem the bonds before they mature. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, the issuer can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As interest rates decline, a bond's yield to maturity or yield to call would also decline.

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity IV. Yield to call

II, I, III, IV

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:

Prerefunded bonds

A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called?

Random selection

Who derives the MOST benefit from a call provision attached to a bond offering?

Issuers

A bond is selling at a discount and yields have remained constant. As the bond gets closer to its maturity, what happens to its price?

It increases

Which of the following statements is TRUE about the call premium of a bond?

It's the amount over par value that the issuer must pay to exercise the call privilege.

If interest rates decline, which of the following securities would probably have the greatest increase in market value?

Long-term bonds

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term bond prices compared to long-term bond prices?

Long-term bonds are more volatile than short-term bonds.

When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT:

Long-term bonds generally provide greater liquidity than short-term bonds

Which of the following bonds would increase most in price if interest rates decline?

Long-term bonds selling at a discount

In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the:

Real interest rate

A municipality will refund a revenue bond issue for all of the following reasons, EXCEPT to:

Reduce the market value of outstanding bonds that are not refunded

What type of risk do zero-coupon bonds eliminate?

Reinvestment risk

Bond issues with staggered maturity dates are known as:

Serial bonds

When bond issues have staggered maturity dates, they're referred to as:

Serial bonds

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates?

Short-term rates fluctuate more sharply than long-term rates.

A .05 change in basis would have the greatest effect on which of the following 6.00% coupon bonds?

2 3/4-year maturity at a 7.15 yield

The current yield on a $1,000 par value 5% bond selling at $800 maturing in 10 years is:

6.25% The current yield is found by dividing the yearly interest payment of $50 by the market price of $800. This equals 6.25%. The fact that the bond will mature in 10 years is not necessary to find th

Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded?

7 1/2% callable in 2023 @ 100

A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be:

7.6%

Which of the following description best defines the term duration?

A measure of a fixed-income security's relative interest-rate risk

An issuer currently has an S&P A- rating. If the ratings service notifies the firm that it has been upgraded by two notches, its new rating would be:

A+

An issuer currently has an S&P AA rating. If the ratings service notifies the firm that it has been downgraded by one notch, its new rating would be:

AA-

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered:

At a discount

Which of the following Moody's ratings is the most speculative?

Ba

Which of the following Moody's ratings is the most speculative in the investment-grade category?

Baa

When a bond is called, the bondholder receives the:

Call price plus accrued interest

Municipal bond rating organizations are concerned primarily with the risk of:

Default

Which of the following statements concerning duration is TRUE?

Duration is a measurement of a given bond's sensitivity to interest-rate swings.

A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is:

Greater than 8 1/2%

Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be:

Improved quality

A call premium is best described as the amount the:

Issuer pays above 100 to retire bonds prior to maturity

A bond is selling at a premium and yields have remained constant. As the bond gets closer to its maturity, what happens to its price?

It decreases

When a client buys a bond above par, the confirmations must indicate the:

Lower of yield to call or yield to maturity

Which of the following terms is used when pricing an entire issue of municipal bonds on a yield-to-call basis?

Mandatory in-whole

Which of the following issues will most likely have a mandatory sinking fund?

Term issues

A decrease in which of the following would cause the price of a bond to increase?

The general level of interest rates

An increase in which of the following will cause the price of an existing bond to decline?

The general level of interest rates

A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE?

The issuer may exercise the call provision anytime after the 8th year

When a bond is selling at a premium:

The market price is greater than the par value

All of the following are TRUE of a bond selling above par, EXCEPT:

The nominal yield is less than the current yield

A bond on which a call notice has been issued is purchased by a customer. Which yield must be disclosed on the confirmation?

The yield to call

If a bond is selling at a premium and is callable at a premium, the yield would be calculated based on:

The yield-to-worst

When comparing long-term bonds to short-term bonds, all of the following statements about long-term bonds are TRUE, EXCEPT:

They usually provide greater liquidity than short-term bonds

If a bond is selling at a premium and is callable at par, how is the yield calculated?

To the call date

A type of bond in which the amount of interest paid to the investor may change is referred to as a:

Variable rate bond

An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 101 1/2. The bond's maturity is 7-1-27, but the issue has been called for redemption on the first call date of 7-1-15 @ par. The customer's confirmation should show the:

Yield to call

Which of the following bond has an interest payment which remains unchanged until maturity?

Zero-coupon bond

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of:

$70,000 An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.

An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is:

5.30%

Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds?

6.25% The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield?

8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. Since each bond has a par value of $1,000 the yearly interest is $80 ( $1,000 x 8%). The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%).

Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased?

A 5 1/4% coupon bond offered on a 5.00 basis

Which of the following choices would have the LEAST amount of interest-rate risk?

A BB-rated corporate debenture that matures in two years

Which of the following yields results in the highest real interest rate?

A bond yields 8% when CPI is at 3%

Which of the following bonds results in the highest real interest rate?

A bond yields 8% when inflation is at 3%.

All of the following statements are TRUE concerning a municipal bond issue having a serial maturity, EXCEPT:

All of the bonds mature on one date in the future

Who derives the MOST benefit from a put provision attached to a bond offering?

Bondholders

The purpose of a sinking fund is to redeem a corporation's:

Bonds

Which of the following statements is NOT TRUE as it relates to a bond selling at a discount?

Interest rates most likely decreased after the bonds were issued.

During an inflationary period when interest rates are rising, the market value of existing bonds would:

Decrease

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds?

Decreasing interest rates

A bond's nominal yield: I. Does not change II. Indicates the amount per thousand that bondholders will receive as income III. Needs to be approved by the board of directors IV. Will go up if interest rates go down

I and II only

Your firm has completed an underwriting of Zylo Plastics subordinated debentures. The bond indenture contains a five-year call protection provision. This covenant would be most valuable to bond purchasers if, during the five years following issuance:

Interest rates decline

A bond is selling at a premium. This indicates that:

Interest rates have decreased since the bond was issued

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if:

Interest rates are falling

The call premium of a bond refers to the amount:

Over par value that the issuer must pay to exercise the call privilege

The major risk of investing in long-term, high-grade bonds is:

Purchasing-power risk

If a bond is currently selling for less than par value, then:

The current yield is higher than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $850. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 9.41% ($80 / $850 = 9.41%).

If a bond is currently selling at a premium, then:

The current yield is lower than the nominal yield

The securities that are deposited in an escrow account for an advance refunding of a municipal bond are:

Treasury bonds

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are:

Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.


Ensembles d'études connexes

FUNDAMENTALS OF NURSING (LECTURE) MIDTERM EXAM

View Set

Kansas Driving: test your Knowledge

View Set

FSM 3175- advanced food safety and sanitation

View Set

nurs 250 final review exam questions

View Set

Managerial Economic BUAD364 Midterm

View Set

the nerves system and sense organs

View Set