Chapter 7 Quiz

A bond that is payable to whomever has physical possession of the bond is said to be in:

Bearer form

Treasury bonds are:

generally issued as semi-annual coupon bonds

Bonds issued by the U.S. government:

are considered to be free of default risk

Protective covenants:

Are primarily designed to protect bondholders.

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

Call premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

The interest rate risk premium is the:

Compensation investors demand for accepting interest rate risk.

Which one of the following applies to a premium bond?

Coupon rate > current yield > yield to maturity.

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Coupon rate decreases and the time to maturity increases.

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?

Face value (1)

A bond's coupon rate is equal to the annual interest divided by which one of the following?

Face value (2)

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

A "fallen angel" is a bond that has moved from:

Investment grade to speculative grade.

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?

List of collateral used as bond security.

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

The current yield is defined as the annual interest on a bond divided by which one of the following?

Market Price

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

Maturity

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

Note