Exam 2 Part 1 Practice Materials

4. Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only

D. II & III only

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? A. default risk B. taxability C. liquidity D. inflation E. interest rate risk

A. default risk

5. A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? A. zero coupon B. callable C. senior D. collateralized E. unsecured

B. callable

Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate A. II only B. I and III only C. I and IV only D. II and III only E. II and IV only

C. I and IV only

Which one of the following is the price a dealer will pay to purchase a bond? A. call price B. asked price C. bid price D. bid-ask spread E. par value

C. bid price

Municipal bonds: A. are totally risk-free. B. generally have higher coupon rates than corporate bonds. C. pay interest that is federally tax-free. D. are rarely callable. E. are free of default-risk

C. pay interest that is federally tax-free

Maya just purchased a bond which pays $40 a year in interest. What is the $40 called?

Coupon

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price E. increase the time period

D. decrease the market price

10. A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only

E. II and IV only

]Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity II. coupon rate > yield-to-maturity III. coupon rate < current yield IV. coupon rate > current yield A. I only B. I and III only C. I and IV only D. II and III only E. II and IV only

E. II and IV only

3. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. note B. discounted C. zero-coupon D. callable E. debenture

E. debenture

]A U.S. Treasury bond that is quoted at 100:11 is selling: A. for 11 percent more than par value. B. at an 11 percent discount. C. for 100.11 percent of face value. D. at par and pays an 11 percent coupon. E. for 100 and 11/32nds percent of face value.

E. for 100 and 11/32nds% of face value

A "fallen angel" is a bond that has moved from: A. being publicly traded to being privately traded. B. being a long-term obligation to being a short-term obligation. C. having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity that is less than the coupon rate. D. senior status to junior status for liquidation purposes. E. investment grade to speculative grade.

E. investment grade to speculative grade

Interest rates that include an inflation premium are referred to as: A. annual percentage rates. B. stripped rates. C. effective annual rates. D. real rates. E. nominal rates.

E. nominal rates

6. A bond that has only one payment, which occurs at maturity, defines which one of the following? A. debenture B. callable C. floating-rate D. junk E. zero coupon

E. zero coupon