fin chap 3

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as

0.05/(1 − t*) = 0.07

A deferred call provision is which one of the following

prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the

protective covenants

Which one of the following rates represents the change if any in your purchasing power as a result of owning a bond

real rate

The Fisher effect is defined as the relationship between which of the following variables

real rates, inflation rates, and nominal rates

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the

spread

The pure time value of money is known as the

term structure of interest rates

The liquidity premium is compensation to investors for

the lack of an active market wherein a bond can be sold for its actual value

An indenture is

the legal agreement between the bond issuer and the bondholders

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called

coupon

collar of a floating-rate bond refers to the minimum and maximum

coupon rates

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

inflation

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return

inflation

Which one of the following premiums is compensation for expected future inflation

inflation

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond

interest rate risk

A fallen angel is a bond that has moved from

investment grade to speculative grade

Municipal bonds

pay interest that is federally tax-free

Which one of the following statements is correct

The real rate must be less than the nominal rate given a positive rate of inflation

A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years The bond was originally issued 3 years ago at par Which one of the following statements is accurate in respect to this bond today

The yield-to-maturity is less than the coupon rate

You want to buy a bond from a dealer Which one of the following prices will you pay

asked price

Which one of the following bonds is the least sensitive to interest rate risk

3-year; 6 percent coupon

Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio Which one of the following bonds is the least suitable for her to own

7-year income bond

Which one of the following relationships is stated correctly

Decreasing the time to maturity increases the price of a discount bond, all else constant

Which one of the following statements concerning bond ratings is correct

Split rated bonds are called crossover bonds

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000 The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct

The bonds will sell at a premium if the market rate is 5.5 percent

The taxability risk premium compensates bond holders for which one of the following

a bond's unfavorable tax status

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity

a discount; less than

Bonds issued by the U.S. government

are considered to be free of default risk

Protective

are primarily designed to protect bondholders

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

bearer form

Which one of the following is the price a dealer will pay to purchase a bond

bid price

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 which one of the following

call premium

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

callable

A call-protected bond is a bond that

cannot be called during a certain period of time

A bond is quoted at a price of $989 This price is referred to as which one of the following

clean price

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks One stream is expressed in nominal values and the other stream is expressed in real values You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows

comparable real rate

The interest rate risk premium is the

compensation investors demand for accepting interest rate risk

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

debenture

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

decrease the market price

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer

default risk

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the

dirty price

Today June 15 you want to buy a bond with a quoted price of 98.64 The bond pays interest on January 1 and July 1 Which one of the following prices represents your total cost of purchasing this bond today

dirty price

A sinking fund is managed by a trustee for which one of the following purposes

early bond redemption

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

face value

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

A U.S. Treasury bond that is quoted at 100:11 is selling

for 100 and 11/32nds percent of face value

Treasury bonds are

generally issued as semi-annual coupon bonds

newly issued bond has a 7 percent coupon with semiannual interest payments The bonds are currently priced at par value The effective annual rate provided by these bonds must be

greater than 7 percent

zero coupon bond

has more interest rate risk than a comparable coupon bond

Callable bonds generally

have a sinking fund provision

Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders These direct payments are a clear indication that the bonds can accurately be defined as being issued

in registered form

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk

increases at a decreasing rate

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

Last year, you purchased a TIPS at par Since that time both market interest rates and the inflation rate have increased by 0.25 percent Your bond has most likely done which one of the following since last year

maintained a fixed real rate of return

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

The specified date on which the principal amount of a bond is payable is referred to as which one of the following

maturity

Interest rates that include an inflation premium are referred to as

nominal rates

Last year, Lexington Homes issued $1 million in unsecured, non-callable debt This debt pays an annual interest payment of $55 and matures 6 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

Cat bonds are primarily designed to help:

nsurance companies fund excessive claims

A 6-year $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1 Assume today is October 1 What will the difference if any, be between this bond's clean and dirty prices today

two month's interest

Currently the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries The 11.6 percent is referred to as which one of the following

yield to maturity

A bond that has only one payment which occurs at maturity defines which one of the following

zero coupon