fin 460 - ch 6

semiannual coupon payments; repayment of principal

A STRIP is a Treasury security in which ________ and ________ can be separated and sold as individual securities.

monthly capital gain or loss; coupon interest paid

A bond index reflects both the _________ plus _________ on a particular type of bond.

private placement.

A sale of a bond issue to a large institutional investor or a group of large investors with or without the help of an investment bank and without SEC registration is called a(n)

Ra/(1 - T)

All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.

bearer; coupons

Bearer bonds are owned by the _______ and have _______ attached to the bond so the bearer can collect interest payments.

taxpayer approval

Because general obligation bonds rely upon tax revenues for repayment, ______ is usually required.

higher; issuer

Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ______ credit rating than the bond ______.

liquidity

Bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market.

default risk

Bond ratings provide investors with a ranking of the ________ of a bond issue.

long-term; capital

Bonds are ________ debt obligations traded in _______ markets.

stock warrants

Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond.

unattractive; higher

Call provisions are _______ to bond holders so callable bonds generally have ______ yields than non-callable bonds.

changes in the attractiveness

Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities.

$1,000; semiannually

Corporate bonds are long-term bonds with a minimum denomination of ______ and coupons that are paid _______.

0.125

Coupon rates on U.S. Treasury notes and bonds are set at multiples of ______ percent when issued.

institutional investors; large investors

Currently, only ______ and _______ as defined by the SEC can participate in private placements of bonds.

secured

Debenture holders generally receive their promised payments only after all ________ debt holders have been paid.

subordinated debentures.

Debentures which are junior in their rights to both secured debt and regular debentures are called

higher than

Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ______ interest rates paid on publicly placed issues.

lower than

Due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.

higher; lower lower; higher

For all three bond rating agencies, ______ risk results in a ______ bond rating.

principal value; inflation

For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______.

inflation-adjusted principal value; semiannual coupon rate

For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______.

Ra = Rb(1 - T)

If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is _____.

informs the bondholders; initiates legal action

If the issuing firm is in violation of the bond indentures, the bond trustee _______ and _______.

exceeds; convert and take a profit does not exceed; not convert

If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.

clean price; does not

In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest.

inflation; the real risk-free rate

Interest rates on all bonds are affected by _______ and _______, which is typically measured using Treasury security rates.

lower; tax-exempt

Investors will accept ______ interest rates on municipal bonds than on corporate bonds due the the ______ nature of municipal bonds.

less well known

Issuers of privately placed bonds tend to be _______ than public issuers.

deferred call

Most bonds have a _______ provision in which the right to call the bond is deferred for a period of time for the benefit of the investors.

term

Most corporate bonds are ______ bonds, meaning that the entire issue matures on a single date.

the OTC market; large

Most secondary bond market trades are carried out on ______ including virtually all _______ transactions.

the economy.

Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with

TIPS

Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds.

40; 60

Over the period 1994 to 2019, approximately ______ to ______ percent of the U.S. national debt consisted of Treasury notes and bonds.

a percentage; face value

Prices of Treasury STRIP securities are quoted as _______ of the ______ of the security.

resale

Private placements of bonds are unregistered but there are restrictions on the _______ of the bonds.

increases

Relative changes in yield spreads can result when the default risk (decreases/increases) for a firm that has one bond issue with a sinking fund provision and another issue without a sinking fund provision.

a slight discount.

Rounding the stop-out yield for a Treasury note or bond down to the nearest 0.125 percent ensures that the issue will sell at

the inflation rate.

Since 1997, the U.S. Treasury has issued Treasury Inflation Protected Securities (TIPS) whose returns are not fixed but are tied to

$1,000,000; $300,000

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year for families in the last two years.

$1,000,000; $200,000

The SEC defines large investors as those with assets of ______ or more, or income above ________ per year in the last two years.

the national debt; other government expenditures

The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.

asked yield; ask price

The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation.

asked yield; ask price

The _______ is the yield to maturity on the Treasury note or bond using the ________ in the calculation.

sinking fund

The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a _________ provision.

coupon rate; face value

The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.

clean price; accrued interest

The dirty price for a Treasury note or bond is the sum of the ______ plus the _______.

greater than

The holder of a stock warrant will exercise the warrant and buy the stock when the market price of the stock is _______ the price specified in the warrant.

A private placement to a small group of investors A public offering using an investment bank as underwriter

The initial primary market sale for municipal bonds occurs through which of the following methods?

a bond; a Treasury security of similar maturity

The interest rate spread is the difference between the yield on ________ and the yield on ___________.

Detroit

The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was

bond indenture.

The legal contract that specifies the rights and obligations of the bond issuer and the bond holders is called the

governments. corporations.

The major issuers of bond market securities (borrowers) are

foreign investors. corporations. governments. households.

The major purchasers of bond market securities (investors) are

$5,000.

The minimum denomination for municipal bonds is typically

$100; $100

The par value of a Treasury security to be resold as a STRIP must be in an amount that will provide semiannual coupon payments of ______ or a multiple of ______.

present value; yield to maturity; semiannual compounding

The price of a STRIP security is the ________ of the face value of the STRIP discounted using the _________ and ________.

upward; downward

The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.

bond trustee.

The representative of the bond holders who monitors compliance with the bond indenture is called the

bond trustee

The sinking fund may be managed by the

tax receipts; project revenues

The source of funds for repayment of municipal bonds is _______ or _______.

default risk; liquidity risk; special bond provisions

The spread measures the return premium a bond earns to compensate the investor for _______, _______ and ________.

the exchange market; the OTC market

The two secondary markets for the trading of corporate bonds are ______ and ______.

government securities brokers and dealers.

Treasury STRIPS are created by and sold to investors through

default risk.

Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from

$100; $100

Treasury notes and bonds are issued in minimum denominations of ______ or in multiples of ______.

true

True or false: A secondary market for municipal bonds exists, though it is generally less active than the secondary market for Treasury bonds.

true

True or false: Treasury notes and bonds trade in very active secondary markets.

false

True or false: Yield changes of bond market securities were uncorrelated over the period from 1980 through 2019.

general obligation; revenue

Two types of municipal bonds exist: _______ and _______ bonds.

interest rate risk; liquidity risk

Unlike Treasury bills, Treasury notes and bonds are subject to _______ risk and _______.

investment banks; national

When a large state or local government issues municipal bonds, many _______ are interested in underwriting the bonds and the bonds can generally be sold in a _______ market.

coupon payment; accrued

When an investor buys a Treasury note or bond between coupon payments, the buyer must compensate the seller for any portion of the ______ that has ______ between the last coupon payment and the settlement date.

best efforts

With ________ underwriting, the investment bank makes no guarantees but acts as a placing or distribution agent for the bonds and collects a fee.

underwriter

With firm commitment underwriting, the _______ assumes the risk that the entire bond issue might not be sold.