Chapter 7 Quiz

Jim purchases $10,000 par value bonds with a 10 percent coupon rate and a 7 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 7 b. 8 c. 10 d. More information is needed to answer this question.

a. 7

A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year. a. True b. False

a. True

Corporate bonds can be placed with investors through a public offering or a private placement. a. True b. False

a. True

The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers. a. True b. False

a. True

Which of the following is not true regarding zero-coupon bonds? a. Zero-coupon bonds pay dividends instead of coupons. b. The issuing firm is permitted to deduct the amortized discount as interest expense, even though it does not pay interest. c. They are issued at a deep discount from par value. d. Investors are taxed annually on the amount of interest earned, even though they will not receive the interest until maturity. e. All of these choices are true.

a. Zero-coupon bonds pay dividends instead of coupons.

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

Explain the use of call provisions on bonds. 1.)A call provision allows investors to exchange the bond for a stated number of shares of the firm's common stock. 2.)A call provision allows the issuing firm to periodically change the coupon rate of its bonds. 3.)A call provision allows the issuing firm to purchase its bonds back prior to maturity at a specific price. How can a call provision affect the price of a bond? A call provision normally requires the firm to pay a price_________ par value when it calls its bonds. a. 1, under b. 3, above c. 2, above d. 3, under

b. 3, above

A private bond placement has to be registered with the SEC. a. True b. False

b. False

Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds. a. True b. False

b. False

During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods. a. True b. False

b. False

Most corporate bonds have a maturity between 2 and 7 years. a. True b. False

b. False

The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies. a. Ratings Oversight Commission b. Office of Credit Ratings c. Office of Agency Supervision d. Federal Ratings Bureau

b. Office of Credit Ratings

Interest earned from Treasury bonds is a. subject to all income taxes. b. exempt from state and local taxes. c. exempt from federal income tax. d. exempt from all income tax.

b. exempt from state and local taxes.

A credit rating agency is paid by: a. the purchasers of the bonds that the agency rates. b. the issuers of the bonds that the agency rates. c. the taxpayers, because the rating agencies are government agencies. d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.

b. the issuers of the bonds that the agency rates.

________ commonly have maturities of 10 years or longer. a. Federal fund notes b. Treasury bills c. Bonds d. Commercial paper certificates

c. Bonds

The coupon rate of most variable-rate bonds is tied to a. the discount rate. b. the federal funds rate. c. LIBOR. d. the prime rate.

c. LIBOR.

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

c. collateralized debt obligations (CDOs)

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.

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. a. Non-negotiable b. Negotiable c. Noncompetitive d. Competitive

d. Competitive

Municipal general obligation bonds are ____. Municipal revenue bonds are ____. a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax b. typically zero-coupon bonds; typically zero-coupon bonds c. always subject to federal taxes; always exempt from state and local taxes d. supported by the municipal government's ability to tax; supported by revenue generated from the project

d. supported by the municipal government's ability to tax; supported by revenue generated from the project