CH 16 Personal Finance Bonds
23) Refer to the Table 16.1. When does the ATT bond mature?
A) 2007
7) ________ bonds are the least risky of all bonds and, therefore, pay a lower rate of interest.
A) Treasury
1) As interest rates rise, the market price of your bond is also likely to rise.
F
1) Bonds are equity investments issued by corporations or government agencies.
F
1) The interest received from U.S. Treasury bonds is exempt from federal, state, and local income taxes.
F
10) Because convertibility is a desirable feature for investors, convertible bonds tend to offer a higher return than non-convertible bonds.
F
11) When a bond has a par or face value of $1,000 and a 6% coupon rate, the semi-annual payment would be $60.
F
13) An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity.
F
2) To completely avoid the risk of default, investors can invest in Treasury bonds or A-rated corporate bonds.
F
3) Generally, bonds have maturities between 10 and 30 years and pay interest annually.
F
1) The risk premium of bonds is the amount by which their annualized yield exceeds the Treasury bond yield.
T
12) During their lifetime, bonds can be sold for more or less than their face value depending on the demand for these particular bonds.
T
2) Since municipal bond interest is exempt from federal income tax, it is especially beneficial to high-income investors.
T
2) The bond par value or face value is the amount the investor will get paid when the bond matures.
T
2) The maturity matching strategy involves selecting bonds that will generate payments to match future expenses.
T
3) Bonds with longer maturities are more sensitive to interest rate movements than bonds that have shorter maturities.
T
4) If you want to receive periodic income from your investments, you should consider investing in bonds rather than stocks.
T
23) A ________ feature on a bond allows the issuer to buy back the bond from the investor before maturity.
C) call
8) ________ bonds do not contain a risk premium because they are free from default risk.
A) Treasury
9) The risk that you will be forced to sell your bond back to the issuer prior to maturity is the
A) call (prepayment) risk.
3) When you select bonds based on the expectation that interest rates will decline, you are using a(n) ________strategy.
A) interest rate
16) A(n) ________ corporate bond will pay a ________ return.
A) lower-rated; higher
14) The ________ is the amount returned to the investor at the maturity date when the bond is due.
A) principal
34) The ________ is the stated interest rate of the bond at the time it was issued.
C) coupon rate
11) Bonds with ________ terms to maturity are ________ sensitive to interest rate movements than bonds that have short terms remaining until maturity.
C) longer; more
10) Municipal bonds are most beneficial for investors whose tax bracket is
C) 28% or more.
24) Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?
C) Convertibility
29) If a company's stock price is expected to increase substantially over the next few years, which of the following may entice potential bondholders to accept a lower coupon rate?
C) Convertibility
6) Treasury bonds have all except which of the following characteristics?
C) Exempt from state and local taxes
15) Issuing bonds has the following disadvantage.
C) Interest must be paid on a periodic basis regardless of earnings
22) Refer to the Table 16.1. How much would a $1,000 par value ATT bond cost as of the day of this listing?
D) $1,055.00
36) The current yield on a $1,000 par value bond worth $900 and a coupon rate of 10% is
D) 11.11%.
18) Which of the following is not a reason investors purchase bonds?
D) Have high risk and return
12) Which of the following does not influence a bond's yield to maturity?
D) Historic yields to maturity
3) Which of the following tax effects could not occur with the purchase and sale of a corporate bond?
D) Interest is not taxable.
5) Which of the following tax implications will result from selling your bonds at a lower price than what you paid for them eight months ago?
D) You have a short-term capital loss
13) Ginnie Mae is an example of a bond issued by
D) an agency of the federal government.
1) A passive strategy of bond investing consists of buying bonds for the long term and not selling them until maturity.
T
1) Figuring the present value of future coupon payments, along with the present value of the principal payment, is a good way to determine the value of a bond.
T
6) As interest rates go up, bond prices
B) go down.
32) The coupon rate of interest on a bond is always stated as a(n)
D) annual rate.
37) What is the semi-annual interest payment on a $1,000 bond with a 7% coupon rate?
B) $35
21) Refer to the Table 16.1. If the ATT bond is a $1,000 par value bond, how much interest does it pay annually?
B) $77.50
24) Refer to the Table 16.1. If the NYTel bond has a $1,000 face value, how much would it cost on the day of this listing?
B) $955.00
38) If a bond pays $50 interest semi-annually with a par value of $1,000, its coupon rate is
B) 10%.
13) Which of the following bond rating classes represents a high quality risk class?
B) Aa
14) Which of the following is not a characteristic of corporate bonds?
B) Are long-term equity securities
25) If a company anticipates a substantive decline in interest rates in the future, which of the following are they likely to include in a bond?
B) Call feature
20) Which of the following is not a feature of a bond?
B) Dividends
8) ________ bonds are issued by state and local government agencies.
B) Municipal
15) Which of the following is not always a true statement?
B) The par value of a bond is its market value.
11) Which of the following is not true regarding municipal bonds?
B) They are free from the risk of default
2) If you buy a corporate bond for $970 and sell it six months later for $1,050, you will have
B) a short-term capital gain of $80.
5) Last yield is calculated by
B) annual interest/market price.
5) All bonds are subject to the following risks except
B) call risk.
27) Bonds that may be exchanged for common stock at the option of the bondholders are called
B) convertible bonds.
26) Callable bonds are issued when interest rates are expected to
B) decline.
31) The return on bonds currently held will be more favorable if interest rates ________ over the period you hold the bonds.
B) decrease
35) If a bond's value rises above its face value during its life, interest rates have
B) decreased.
7) Bonds with a ________ degree of default risk are most susceptible to default when economic conditions are ________.
B) high; weak
28) Convertible bonds tend to offer a(n) ________ return than non-convertible bonds.
B) lower
9) Municipal bonds tend to have a ________ coupon rate than Treasury bonds issued at the same time; however, municipal bonds usually offer a(n) ________ after-tax return to investors.
B) lower; higher
30) If a bond's price were lower than the principal amount, its yield to maturity would be ________ the coupon rate.
B) more than
10) The ________ is an additional return beyond the risk-free rate that can be earned from a deposit guaranteed by the government.
B) risk premium
16) Bonds usually pay interest
B) semi-annually.
19) Investors purchase bonds because
B) they pay interest income.
17) You should consider investing in bonds rather than stock if you
B) wish to receive income from your investment.
5) Your son will be ready for college in 10 years and your daughter in 15. Which of the following bond strategies would be best suited to your goal of financing your children's education?
C) Maturity matching
17) Which of the following bond issuers would be subject to both federal and state income taxes?
C) National Semiconductor
18) Which of the following is not true of corporate bonds?
C) They are very secure and almost never default
33) On the secondary bond market,
C) bond prices vary with interest rate movement and other factors.
4) The relationship between a bond's price and the yield to maturity
C) is inverse
4) The ________ strategy is intended to generate periodic and stable interest income.
C) passive
21) Investing in bonds gives you the possibility of all of the following except
C) receiving dividends.
22) Investors are willing to purchase bonds with a call feature only if the bonds offer a(n)
C) slightly higher return than similar bonds without a call feature.
12) Federal agency bonds are all of the following except
D) are issued by organizations owned by the federal government.
19) Another name for high-yield bonds is
D) junk bonds.
20) Corporate bond quotations in the daily financial newspapers include all except
D) original face value of the bond.
3) Municipal bonds are those issued by the U.S. Treasury Department for the benefit of cities and states.
F
4) If you expect interest rates to rise over time, you should consider investing in bonds with longer maturities.
F
7) Bonds are issued with a callable feature when the issuers expect interest rates to rise.
F
8) A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.
F
4) Junk bonds offer a relatively high rate of return, but they are more likely to default than other bonds.
T
5) A call feature on bonds allows the issuer to buy back the bonds from investors before the maturity date.
T
6) Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature.
T
9) A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured.
T