FINC 310 (Ch. 7)

Which of the following statements is incorrect? a. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds. b. The income earned from municipal bonds is exempt from federal taxes. c. The municipal bond must pay a risk premium to compensate for the possibility of default risk. d. All of these choices are true.

a. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.

A call provision normally requires an issuing firm to pay a call premium when it calls its bonds. a. True b. False

a. True

Bond collateral is usually a mortgage on real property (land and buildings). a. True b. False

a. True

Payments on revenue bonds must be generated by revenues of the project for which the bonds were issued. a. True b. False

a. True

Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only. a. True b. False

a. True

Using more debt and less equity in the capital structure implies a higher degree of financial leverage. a. True b. False

a. True

When would a firm most likely call bonds? a. after interest rates have declined b. if interest rates do not change c. after interest rates increase d. just before the time at which interest rates are expected to decline

a. after interest rates have declined

Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities. a. collateralized debt obligations (CDOs) b. credit default swaps c. reverse loans d. inverted bonds

a. collateralized debt obligations (CDOs)

A variable rate bond allows a. investors to benefit from rising market interest rates over time. b. issuers to benefit from rising market interest rates over time. c. investors to benefit from declining rates over time. d. None of these choices are correct.

a. investors to benefit from rising market interest rates over time.

Interest earned from Treasury bonds _______ subject to federal income tax and ________ subject to state and local taxes. a. is; is not b. is not; is c. is: is d. is not; is not

a. is; is not

When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond. a. limit order b. market order c. stop order d. price order

a. limit order

The ________ price is the price an investor is ________. a. ask; willing to sell a bond for b. Answers [bid; willing to pay for a bond] and [ask; willing to sell a bond for] are correct. c. bid; willing to sell a bond for d. bid; willing to pay for a bond e. ask; willing to pay for a bond

b. Answers [bid; willing to pay for a bond] and [ask; willing to sell a bond for] are correct.

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. A b. Baa c. Aa d. Aaa e. None of these choices are correct.

b. Baa

Any issuer of Eurobonds has to issue dollar-denominated bonds. a. True b. False

b. False

The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. a. True b. False

b. False

The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False

b. False

Which of the following statements is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed on the total amount of interest earned at maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity. d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. e. All of the above are true.

b. Investors are taxed on the total amount of interest earned at maturity.

___ bonds have the most active secondary market. a. Junk b. Treasury c. Municipal d. Zero-coupon corporate

b. Treasury

The ________ requires that an issuing firm retire a certain amount of a bond issue each year. a. trustee feature b. sinking-fund provision c. convertibility feature d. call feature

b. sinking-fund provision

If interest rates suddenly ________, those existing bonds that have a call feature are ________ likely to be called. a. increase; more b. decline; less c. Answers [decline; more] and [increase; less] are correct. d. increase; less e. decline; more

c. Answers [decline; more] and [increase; less] are correct.

________ bonds are bonds issued by foreign governments. a. Yankee b. Mortgage c. Sovereign d. Chattel e. None of these choices are correct.

c. Sovereign

Which of the following is not an example of a municipal bond? a. general obligation bond b. revenue bond c. Treasury bond d. All of the above are examples of municipal bonds

c. Treasury bond

If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ________ debt and ________ equity, which implies a ________ degree of financial leverage. a. less; more; higher b. more; less; lower c. more; less; higher d. None of these choices are correct.

c. more; less; higher

A protective covenant may a. specify all the rights and obligations of the issuing firm and the bondholders. b. require the firm to retire a certain amount of the bond issue each year. c. restrict the amount of additional debt the firm can issue. d. none of the above

c. restrict the amount of additional debt the firm can issue

Some bonds are "stripped," which means that a. they have defaulted. b. the call provision has been eliminated. c. they are transferred into principal-only and interest-only securities. d. their maturities have been reduced.

c. they are transferred into principal-only and interest-only securities.

Which of the following statements is not true regarding STRIPS? a. They are created and sold by various financial institutions. b. They are backed by the U.S. government. c. They are not issued by the Treasury. d. They have to be held until maturity. e. All of these choices are true regarding STRIPS.

d. They have to be held until maturity

A ________ is secured by personal property; a ________ is a bond unsecured by specific property. a. first mortgage bond; chattel mortgage bond b. chattel mortgage bond; first mortgage bond c. first mortgage bond; debenture d. chattel mortgage bond; debenture e. None of these choices are correct.

d. chattel mortgage bond; debenture