chapter 14

27. 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

28. 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 these is correct.

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

18. Accrued interest A. is quoted in the bond price in the financial press. B. must be paid by the buyer of the bond and remitted to the seller of the bond. C. must be paid to the broker for the inconvenience of selling bonds between maturity dates. D. is quoted in the bond price in the financial press and must be paid by the buyer of the bond and remitted to the seller of the bond. E. is quoted in the bond price in the financial press and must be paid to the broker for the inconvenience of selling bonds between maturity dates.

B. must be paid by the buyer of the bond and remitted to the seller of the bond.

25. 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.

65. 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 these are correct. E. the discount rate that will set the present value of the payments equal to the bond price, and based on the assumption that any payments received are reinvested at the coupon rate.

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

30. 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.

24. 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.

26. 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

14. Of the following four investments, ________ is considered the least risky. A. Treasury bills B. corporate bonds C. U. S. Agency issues D. Treasury bonds E. commercial paper

A. Treasury bills

1. 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 these is correct

A. annual interest payment divided by the current market price

35. 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 these is correct.

A. minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock

19. The invoice price of a bond that a buyer would pay is equal to A. the asked price plus accrued interest. B. the asked price less accrued interest. C. the bid price plus accrued interest. D. the bid price less accrued interest. E. the bid price.

A. the asked price plus accrued interest.

29. 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

17. At issue, coupon bonds typically sell ________. A. above par value B. below par C. at or near par value D. at a value unrelated to par E. None of these is correct.

C. at or near par value

64. 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 these is correct

C. yield to maturity

15. To earn a high rating from the bond rating agencies, a firm should have A. a low times interest earned ratio B. a low debt to equity ratio C. a high quick ratio D. both a low debt to equity ratio and a high quick ratio E. both a low times interest earned ratio and a high quick ratio

D. both a low debt to equity ratio and a high quick ratio

66. 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 these is correct.

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

73. Which one of the following statements about convertibles is false? A. The longer the call protection on a convertible, the less the security is worth. B. The more volatile the underlying stock, the greater the value of the conversion feature. C. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. E. The longer the call protection on a convertible, the less the security is worth, the smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth and the collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

E. The longer the call protection on a convertible, the less the security is worth, the smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth and the collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

13. Of the following four investments, ________ is considered the safest. A. commercial paper B. corporate bonds C. U. S. Agency issues D. Treasury bonds E. Treasury bills

E. Treasury bills

16. A firm with a low rating from the bond rating agencies would have A. a low times interest earned ratio B. a low debt to equity ratio C. a low quick ratio D. both a low debt to equity ratio and a low quick ratio E. both a low times interest earned ratio and a low quick ratio

E. both a low times interest earned ratio and a low quick ratio

23. 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. both that the bonds are insured and the bonds are junk bonds E. both that the bonds are junk bonds and the bonds are referred to as "high yield" bonds

E. both that the bonds are junk bonds and the bonds are referred to as "high yield" bonds