FIN327 TOPIC 7 Chap 14 & 16

The bond market A. can be quite "thin." B. primarily consists of a network of bond dealers in the over-the-counter market. C. consists of many investors on any given day. D. can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market. E. primarily consists of a network of bond dealers in the over-the-counter market and consists of many investors on any given day.

D. can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market.

Ceteris paribus, the duration of a bond is negatively correlated with the bond's A. time to maturity. B. coupon rate. C. yield to maturity. D. coupon rate and yield to maturity. E. None of the options

D. coupon rate and yield to maturity.

The "modified duration" used by practitioners is equal to the Macaulay duration A. times the change in interest rate. B. times (one plus the bond's yield to maturity). C. divided by (one minus the bond's yield to maturity). D. divided by (one plus the bond's yield to maturity). E. None of the options

D. divided by (one plus the bond's yield to maturity).

Convertible bonds A. give their holders the ability to share in price appreciation of the underlying stock. B. offer lower coupon rates than similar nonconvertible bonds. C. offer higher coupon rates than similar nonconvertible bonds. D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds. E. give their holders the ability to share in price appreciation of the underlying stock and offer higher coupon rates than similar nonconvertible bonds.

D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds.

A bond will sell at a discount when A. the coupon rate is greater than the current yield and the current yield is greater than yield to maturity. B. the coupon rate is greater than yield to maturity. C. the coupon rate is less than the current yield and the current yield is greater than the yield to maturity. D. the coupon rate is less than the current yield and the current yield is less than yield to maturity. E. None of the options is true.

D. the coupon rate is less than the current yield and the current yield is less than yield to maturity.

85. Debt securities are often called fixed-income securities because A. the government fixes the maximum rate that can be paid on bonds. B. they are held predominantly by older people who are living on fixed incomes. C. they pay a fixed amount at maturity. D. they promise either a fixed stream of income or a stream of income determined by a specific formula. E. they were the first type of investment offered to the public, which allowed them to "fix" their income at a higher level by investing in bonds.

D. they promise either a fixed stream of income or a stream of income determined by a specific formula.

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity. A. current yield B. dividend yield C. P/E ratio D. yield to maturity E. discount yield

D. yield to maturity

Which of the following is true? A. Holding other things constant, the duration of a bond decreases with time to maturity. B. Given time to maturity, the duration of a zero-coupon increases with yield to maturity. C. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. D. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. E. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower and duration is a better measure of price sensitivity to interest rate changes than is time to maturity

E. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower, and duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

Collateralized bonds A. rely on the general earning power of the firm for the bond's safety. B. are backed by specific assets of the issuing firm. C. are considered the safest variety of bonds. D. All of the options are true. E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

Subordination clauses in bond indentures A. may restrict the amount of additional borrowing the firm can undertake. B. are always bad for investors. C. provide higher priority to senior creditors in the event of bankruptcy. D. All of the options are true. E. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

E. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B" rating indicates A. the bonds are insured. B. the bonds are junk bonds. C. the bonds are referred to as "high-yield" bonds. D. the bonds are insured or junk bonds. E. the bonds are "high-yield" or junk bonds.

E. the bonds are "high-yield" or junk bonds.

A coupon bond that pays interest semi-annually is selling at par value of $1,000, matures in seven years and has a coupon rate of 8.6%. The yield to maturity on this bond is A. 8.0%. B. 8.6%. C. 9.0%. D. 10.0%. E. None of the options

8.6

A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are A. 1.0% and 1.2%. B. 0.5% and .7%. C. 1.2% and 1.0%. D. 0.7% and 0.5%. E. None of the options

A) 1.0% and 1.2% Rationale: Exxon: 7.2% - 6.2% = 1.0%; Xerox: 7. 9% - 6.7% = 1.2%.

A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The default risk premiums on the bonds issued by Exxon and Lucent Technologies, respectively, are A. 1.6% and 3.3%. B. 0.5% and 0.7%. C. 3.3% and 1.6%. D. 0.7% and 0.5%. E. None of the options

A) 1.6% and 3.3% 6.2% - 4.6% = 1.6%; Lucent Technologies: 8.9% - 5.6% = 3.3%

The current yield on a bond is equal to A. annual interest payment divided by the current market price. B. the yield to maturity. C. annual interest divided by the par value. D. the internal rate of return. E. None of the options

A. annual interest payment divided by the current market price.

The _________ gives the number of shares for which each convertible bond can be exchanged. A. conversion ratio B. current ratio C. P/E ratio D. conversion premium E. convertible floor

A. conversion ratio

A coupon bond is a bond that A. pays interest on a regular basis (typically every six months). B. does not pay interest on a regular basis, but pays a lump sum at maturity. C. can always be converted into a specific number of shares of common stock in the issuing company. D. always sells at par. E. None of the options

A. pays interest on a regular basis (typically every six months).

Ceteris paribus, the duration of a bond is positively correlated with the bond's A. time to maturity. B. coupon rate. C. yield to maturity. D. All of the options E. None of the options

A. time to maturity.

Which of the following is not true? A. Holding other things constant, the duration of a bond increases with time to maturity. B. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. C. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. D. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. E. All of the options

B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. Rationale: The duration of a zero-coupon bond is equal to time to maturity, and is independent of yield to maturity.

A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are A. 3.33% and 2.10%. B. 2.57% and 2.86%. C. 1.2% and 1.0%. D. 0.76% and 0.47%. E. None of the options

B. 2.57% and 2.86%.

Swingin' Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is known as A. a contingency bond. B. a catastrophe bond. C. an emergency bond. D. an incident bond. E. an eventuality bond.

B. a catastrophe bond.

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict A. required coupon rates for new bond issues. B. bankruptcy risk. C. the likelihood of a firm becoming a takeover target. D. the probability of a bond issue being called. E. None of the options

B. bankruptcy risk.

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be A. higher. B. lower. C. the same. D. Cannot be determined E. $1,000.

B. lower.

Ceteris paribus, the price and yield on a bond are A. positively related. B. negatively related. C. sometimes positively and sometimes negatively related. D. not related. E. indefinitely related.

B. negatively related.

The yield to maturity on a bond is A. below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium. B. the discount rate that will set the present value of the payments equal to the bond price. C. based on the assumption that any payments received are reinvested at the coupon rate. D. None of the options

B. the discount rate that will set the present value of the payments equal to the bond price.

The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. C. the unsystematic risk caused by factors unique in the bond. D. the risk related to the possibility of bankruptcy of the bond's issuer and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. E. All of the options

B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.

Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5-year, 0% coupon bond B. 5-year, 12% coupon bond C. 5 year, 14% coupon bond D. 5-year, 10% coupon bond E. Cannot tell from the information given

C) 5 year, 14% coupon bond Rationale: Duration (and thus price volatility) is lower when the coupon rates are higher.

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity. A. Bond X because of the higher yield to maturity. B. Bond X because of the longer time to maturity. C. Bond Y because of the longer duration. D. Both have the same sensitivity because both have the same yield to maturity. E. None of the options

C) Bond Y because of the longer duration.

The duration of a 5-year zero-coupon bond is A. smaller than 5. B. larger than 5. C. equal to 5. D. equal to that of a 5-year 10% coupon bond. E. None of the options

C) equal to 5. Rationale: Duration of a zero-coupon bond equals the bond's maturity.

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is lower. D. current yield is higher. E. None of the options

C) yield to maturity is lower

A coupon bond that pays interest annually is selling at par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is A. 8.0%. B. 8.3%. C. 9.0%. D. 10.0%. E. None of the options

C. 9.0%. Answer: C Difficulty: Easy Rationale: When a bond sells at par value, the coupon rate is equal to the yield to maturity.

82. When a bond indenture includes a sinking fund provision, A. firms must establish a cash fund for future bond redemption. B. bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. D. firms must establish a cash fund for future bond redemption and bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. E. None of the options is true.

C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.

80. TIPS are A. securities formed from the coupon payments only of government bonds. B. securities formed from the principal payments only of government bonds. C. government bonds with par value linked to the general level of prices. D. government bonds with coupon rate linked to the general level of prices. E. zero-coupon government bonds.

C. government bonds with par value linked to the general level of prices.

Most corporate bonds are traded A. on a formal exchange operated by the New York Stock Exchange. B. by the issuing corporation. C. over the counter by bond dealers linked by a computer quotation system. D. on a formal exchange operated by the American Stock Exchange. E. on a formal exchange operated by the Philadelphia Stock Exchange.

C. over the counter by bond dealers linked by a computer quotation system.

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date. A. callable B. coupon C. put D. Treasury E. zero-coupon

C. put Any bond may be redeemed prior to maturity, but all bonds other than put bonds are redeemed at a price determined by the prevailing interest rates.

The ________ is used to calculate the present value of a bond. A. nominal yield B. current yield C. yield to maturity D. yield to call E. None of the options

C. yield to maturity

Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is A. higher. B. lower. C. equal to the risk-free rate. D. the bond's duration is independent of the discount rate. E. None of the options

D) The bond's duration is independent of the discount rate.

38. A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%. A. $712.99 B. $620.92 C. $1,123.01 D. $886.28 E. $1,000.00

D. $886.28

A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are A. 1.0% and 1.2%. B. 0.7% and 1.5%. C. 1.2% and 1.0%. D. 0.8% and 1.3%. E. None of the options

D. 0.8% and 1.3%. Shell: 6.5% - 5.7% = .8%; Ford: 7.5% - 6.2% = 1.3%.

The duration of a bond is a function of the bond's A. coupon rate. B. yield to maturity. C. time to maturity. D. All of the options E. None of the options

D. All of the options

Callable bonds A. are called when interest rates decline appreciably. B. have a call price that declines as time passes. C. are called when interest rates increase appreciably. D. are called when interest rates decline appreciably and have a call price that declines as time passes. E. have a call price that declines as time passes and are called when interest rates increase appreciably.

D. are called when interest rates decline appreciably and have a call price that declines as time passes. Callable bonds often are refunded (called) when interest rates decline appreciably. The call price of the bond (approximately par and one year's coupon payment) declines to par as time passes and maturity is reached.

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A. deferral. B. reissue. C. repurchase. D. refunding. E. None of the options

D. refunding.

If a 7% coupon bond is trading for $975.00, it has a current yield of A. 7.00%. B. 6.53%. C. 7.24%. D. 8.53%. E. 7.18%.

E. 7.18%.

The basic purpose of immunization is to A. eliminate default risk. B. produce a zero net-interest-rate risk. C. offset price and reinvestment risk. D. eliminate default risk and produce a zero net-interest-rate risk. E. produce a zero net-interest-rate risk and offset price and reinvestment risk.

E. produce a zero net-interest-rate risk and offset price and reinvestment risk. Rationale: When a portfolio is immunized, price risk and reinvestment risk exactly offset each other resulting in zero net interest-rate risk.

Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________. A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B. maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C. minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes D. maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company E. None of the options

Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________. A) minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B) maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C) minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes D) maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company E) none of the above Rationale: Floating rate bonds allow the investor to earn a rate of interest income tied to current interest rates, thus negating one of the major disadvantages of fixed income investments. Convertible bonds allow the investor to benefit from the appreciation of the stock price, either by converting to stock or holding the bond, which will increase in price as the stock price increases.

A zero-coupon bond is one that

effectively has a zero percent coupon rate.