Chapter 2.1 the basic of bonds
An investor owns a bond with a 3.5% nominal yield making semiannual interest payments. On each interest payable date, the investor can expect to receive how much
$17.50
A bond with a 3% stated yield and a $1,000 par value would pay how much in annual interest
$30
An investor has purchased a bond with a 5% coupon. This investor will receive
$50 annual interest until maturity
Which of the following best describes what 1 bond point equals
1% of $1,000
accrued interest on corporate bonds is calculated using
30 days in each month and 360 days in each year
each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of
4%
6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures
5% ($60/$1,200)
An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of
5.6%
a registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct
6% is the bond's coupon and 6.5% is the bond's yield to maturity
A bond has a 7% coupon and is currently offered at a price of 102, which of the following yields could be the yield to maturity for this bond?
6.55%
The current yield on a bond with a coupon rate of 7.5% currently selling at 105 1/2 is approximately
7.1%
A bond that is structured so that the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is
A balloon bond
Regarding different types of debt security maturities available to issuers, which of the following is accurate
A balloon maturity uses elements of both serial and term maturities
A bond that is structured so that the principal of the whole issue matures at once is
A term bond
Which of the following statements regarding bond interest is true?
Bond prices have an inverse relationship to interest rates
Par value for a bond is also known as
Face value or the amount a bond will be redeemed for at maturity
The relationship between fixed-income prices and prevailing interest rates is
Inverse
Which of the following are fixed at the time a bond is issued
Nominal yield
A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest
Nominal yield, current yield, yield to maturity, yield to call
When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?
Nothing; it does not change
Which of the following would be least likely to directly impact a bonds yield
Number of bonds in the issue
A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond
Serial
when an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond?
Serial
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
Term
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true?
The bond's current yield equals $65/$1,100 or 5.9%
The coupon rate on a debt security represents
The interest rate the issuer has agreed to pay the investor
with a balloon maturity
The major portion of the principal debt is paid on the final maturity date
The city of Philadelphia issued $100 million in GO debt three years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client, who purchased one of these bonds on the initial offering, calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that
The nominal yield is higher than the yield to maturity
An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity,
The premium paid decreases the return
An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see
The price of the bond move higher
the coupon payable on a bond may also be referred to
The stated or nominal yield
a customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true
Yield to call is the same as yield to maturity
A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is
a bond
When selling a bond, the issuer is taking
a borrower's position
When purchasing a bond, the investor is taking on
a creditor position
An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at
a discount
A balloon maturity for an issuer's debt securities is most accurately described as
a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue
Assuming $1,000 par value, a bond priced at $1,200 is trading at
a premium
Interest is best described as
a specific rate of return the borrower pays the investor for use of the funds
Yield to call calculations reflect the early redemption date and
acceleration of the discount gain if the bond was originally purchased at a discount, and accelerated premium loss if the bond was originally purchased at a premium
A bond with a 4.5% stated yield might make
annual interest payments of $45 and semiannual interest payments of $22.50
Which of the following expressions describes the current yield of the bond?
annual interst (coupon) payment divided by current market price.
At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased
at a discount
When interest rates in the open market move up or down, a bond's coupon rate will
be unaffected by the open-market interest rates
the time to maturity for debt instruments
can be any length of time
A bond having a call feature
can be redeemed before maturity at the issuer's option
An issuer of bonds can be
corporate and both the federal and municipal governments
All of the following are names for the rate states on the face of the bond except
current yield
If a callable bond is priced at par, which of the following is true?
current yield equals yield to call
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true?
current yield is higher than nominal yield, and nominal yield is lower than yield to maturity
Your customer holds a callable bond currently trading at $935. Which of the following is true
current yield is lower than yield to maturity
All of the following are corporate secured bonds except
debentures
For a corporate bond, once issued, nominal yield
does not change in response to interest rate movements
With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade
downward in price
A bond offered at par has a yield to maturity
equal to its current yield
An investor purchases a bond offered at par. The bond has a coupon rate
equal to its current yield
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is
greater than 6.10
A customer buys a 4% treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity is
greater than nominal yield
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
increases
An investor holds a 4% bond, callable in 8 years, and maturing in 12 years. The bond's current yield measures its annual coupon payment relative to
its market price
An investor holds a 5% bond callable in six years and maturing in eight years. The bonds current yield measures its annual coupon payment relative to
its market price
An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be
less than the coupon
Bonds can be issued with additional features attached, making them more attractive to investor. All of the following can be considered such features except
maturity
An investor lending money to an entity received back the principal amount of the loan on
maturity date
A stated coupon on a bond is its
nominal yield
the coupon on a bond can be described as
nominal yield
The coupon for a bond is calculated as a percentage of
par value, usually $1,000 for a bond
a serial bond is best described as
portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid
two benefits of owning preferred stock over common stock are
priority at liquidation and payment of dividends
A bond is trading at a price of $1,150 in the secondary market. If purchased at this price and held to maturity, this will
reduce the investors return
All of the following are types of maturities for debt instruments except
series
Which of the following would all be considered the same regarding yields on debt instruments
stated, nominal, and coupon yields
Bonds can typically be issued with
term, serial, or balloon maturities
A customer buys a 10% bond with a current yield of 12% and holds the bond until one year maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct
the bond was purchased at a discount and the bond was sold at a premium
A bond certificate represents
the borrower's obligation to repay the amount it borrowed plus interest
Which of the following statements is most accurate about feature benefits
the call feature benefits the issuer; the put feature benefits the investor
The market forces that typically drive the price of a bond trading in the secondary market would include all of the following except
the price of the issuer's stock
If a bond is trading at a premium, rank the following rates from low to high
yield to call, yield to maturity, current yield, nominal yield
for a callable bond priced at a discount
yield to maturity will be lower than the yield to call
