Chapter 6 Reading Two

If the nominal rate of interest is 10% and the rate of inflation is 3%, the real interest rate is ____.

6.8% Reason: Correct. 1 + real interest rate = (1 + 0.1)/(1 + 0.03) = 1.068 − 1 = 0.068 or 6.8%.

Conditions imposed on borrowers to protect lenders from unreasonable risk are known as ______.

Conditions imposed on borrowers to protect lenders from unreasonable risk are known as ______.

Even when the yield curve of a long-term bond is upward-sloping, some investors prefer short-term bonds. Which of the following reasons would explain why this statement is true?

Prices of long-term bonds fluctuate more than prices of short-term bonds. Short-term investors can profit if interest rates rise.

The U.S. Treasury issues ___________, which adjust nominal cash flows based on the consumer price index.

TIPS Reason: Correct. Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds that adjust nominal cash flows based on changes in the consumer price index.

Corporate debt depends on the value and the risk of the firm's ______.

assets

Secured debt is tied to specific assets, called

collateral

Which of the following are not plain vanilla bonds? Multiple select question. convertible bonds coupon bonds floating-rate bonds zero-coupon Bonds

convertible bonds floating-rate bonds zero-coupon Bonds

Which type of bond generally offers the highest yield?

corporate

Limitation or subordination of new debt is a form of a protective ____ on existing debt.

covenant

The additional yield on a bond that investors require for bearing default risk is known as ______.

default premium

The banking crisis of 2007-2009 shows that investors prefer ________ in bonds; therefore, heavily traded bonds offer ________ yields.

higher liquidity, lower

Long-term bond prices are more sensitive than short-term bond prices to ______.

increases in interest rates

Which type of bond links coupon payments to inflation?

indexed bonds

Because the _____ rate is uncertain, so is the _______ rate of interest offered on bonds.

inflation, real Reason: Correct. Because the inflation rate is uncertain, so is the real rate of interest offered on bonds.

Bonds rated Baa or above by Moody's or BBB or above by Standard & Poors are known as ______.

investment grade bonds

Bonds rated Ba or below by Moody's or BB and below by Standard & Poors are known as ______.

junk bonds

What is the term used in finance to represent simple, standard, and common?

plain vanilla

Which of the following are steps bondholders can take to minimize default risk? seniority protective covenants buying junk bonds security

protective covenants seniority security

When a firm puts up collateral assets to back up a loan, the debt is said to be ______.

secured

Investors looking to minimize risk will hold which type of debt?

senior

Which debt is paid first in the event of bankruptcy?

senior debt

A graph of the yield curve shows the bond yield to maturity on the _____ axis and the time to maturity on the _____ axis.

vertical, horizontal

A plot drawn to show the relationship between bond yields and maturity is known as the ______.

yield curve