FIN 3080 - Chapter 6

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity. - True - False

False

A treasury STRIP is sometimes referred to as a TIPS - True - False

False

Bond rating use a classification system to give investors an idea of the amount of interest rate risk associated with the bond issue. - True - False

False

Bonds that give the bondholder the opportunity to purchase common stock at a respecified price up to a specified date are called convertible bonds. - True - False

False

Callable bonds have lower required yields than similar convertible bonds, ceteris paribus (with other things the same). - True - False

False

Revenue bonds are backed by the full revenue of the municipality. - True - False

False

The dirty price plus accrued interest is called the clean price of the security. - True - False

False

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI. - True - False

False

When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is known as a A) Rights Offering B) Private Placement C) Firm Commitment D) Best Efforts E) Standby Offering

Firm Commitment

Brady bonds are sometimes converted to _____ when the issuer's credit rating improves. A) Samurai Bonds B) Zombie Bonds C) Bulldog Bonds D) Sovereign Bonds E) Phoenix Bonds

Sovereign Bonds

A T-Bond with a $1,000 par is quote at a bid of 110:12 and an ask of 110:15. If you sell the bond, you will receive A) $1,103.75 B) $1,104.69 C) $1,101.20 D) $1,101.50 E) None of the above

$1,103.75 ($1,000 x 1.1) + (12/32 x 10) = $1,103.75

An investor buys a $10,000 par, 3% coupon TIPS security with 2 years to maturity. If inflation every six months over the investor's holding period is 2%, what is the final payment the TIPS investor will receive? A) $10,150.00 B) $10,344.15 C) $10,745.68 D) $10,824.32 E) $10,986.69

$10,986.69 ($10,000 x 1.02^4) x [1 + (0.03 / 2)] = $10,986.69

A life insurer owes $75,000 in 6 years. To fund this outflow, the insurer wishes to buy STRIPs that mature in 6 years. The STRIPs have $3,000 face value per STRIP and pay a 7% EAR. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)? A) $10,000 B) $25,000 C) $49,634 D) $45,649 E) $41,877

$49,634 [$3,000 / (1.035 ^ 12)] x ($75,000 / $3,000) = $49,634

On June 1, 2000, you purchase a $10,000 par T-Note that matures in 5 years. The coupon rate is 6% and the price quote is 98:6. The last coupon payment was May 1, 2000 and the next is November 1, 2000 (184 days total). The accrued interest is A) $75.35 B) $101.00 C) $50.54 D) $40.65 E) $35.67

$50.54 No idea :(

A T-Bond with a $1,000 par is quoted at 98:20 Bid, 98:24 Ask. The clean price for you to buy this bond is A) $986.25 B) $987.50 C) $982.00 D) $982.40 E) None of the Above

$987.50 No idea :(

A T-Bond with a $10,000 par is quoted at a bid of 96:10 and an ask of 96:14. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)? A) $12.50 B) -$12.50 C) -$4.00 D) $4.00 E) $0.00

-$12.50 No idea :(

A holder of Rainbow Funds convertible bonds with a $1,000 price can convert the bond to 20 shares of common stock. The stock is currently priced at $44/share. By what percent does the stock price have to rise to make conversion potentially attractive? A) 10.00% B) 14.73% C) 11.11% D) 13.64% E) 10.69%

13.64% [($1,000 / 20) / $44] - 1 = 13.64%

An investor is trying to decide between a municipal bond paying 6% or an equivalent taxable corporate paying 7.5%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? A) 80.00% B) 20.00% C) 25.00% D) 66.67% E) 33.33%

20.00% 1 - (0.06 / 0.075) = 20.00%

You purchase a $1,000 par convertible bond that can be converted into 142 shares of stock. The stock is currently priced at $5.42. What percentage price increase in the stock is needed to make conversion worthwhile? A) 15.5% B) 29.9% C) 18.2% D) 23.7% E) 19.8%

29.9% [($1,000 / 142) / $5.42] - 1 = 29.9%

An 18-year T-Bond can be stripped into how many separate securities A) 18 B) 19 C) 36 D) 37 E) 38

37 (18 * 2) + 1 = 37 securities

The quoted ask yield on a 12 year $1,000 par T-Bond with a 5% coupon and a price quote of 106:22 is (use semi-annual compounding) A) 5.00% B) 4.32% C) 4.36% D) 2.16% E) 2.18%

4.32% No idea :(

The quoted ask yield on a 15-year $1,000 par T-Bond with a 6% semi-annual payment coupon and a price quote of 104:12 is A) 6.00% B) 5.60% C) 5.57% D) 2.81% E) 2.78%

5.57% No idea :(

A bond investor has a 99% chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond, but only 97% chance in the second year and beyond. What is the cumulative default probability over the first three years she holds the bond? A) 6.85% B) 7.00% C) 9.00% D) 7.32% E) 7.55%

6.85% 1 - (0.99 x 0.97 x 0.97) = 6.85%

The January 1, 2005 ask yield on a Treasury STRIP maturing in 8 years is 5.488%. If the face value is $1,000, what should be the QUOTED cost of the STRIP today (use semi-annual compounding)? A) 60:00 B) 64:03 C) 64:63 D) 64:27 E) 64:12

64:03 $1,000 / [1 + (0.05488 / 2)]^(8*2) = $648.4799

An investor is in the 28% federal tax bracket, pays an 8% state tax rate and 2% in local income taxes. For this investor, a municipal bond paying 6% interest is equivalent to a corporate bond paying _____ interest. A) 15.79% B) 8.33% C) 9.38% D) 9.68% E) 8.47%

9.68% 0.06 / [1 - (0.28 + 0.08 + 0.02)] = 9.68%

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus? A) AAA rated noncallable corporate bond with a sinking fund B) AA rated callable corporate bond with a sinking fund C) AAA rated callable corporate bond with a sinking fund D) High quality municipal bond E) AA rated callable corporate bond without a sinking fund

AA rated callable corporate bond without a sinking fund

SEC Rule 144 A does which of the following? A) Allows privately placed investments to be traded on a limited basis B) Allows bond issuers to call their bonds when desired C) Determines the limits of responsibility of bond covenants D) Requires that bonds traded on the NYSE bond market utilize the ABS system E) None of the above

Allows privately placed investments to be traded on a limited basis

Calculation

Calculation

Standard revenue bonds are A) Backed by the full taxing authority of the municipality B) Collateralized by the earnings from a specific project C) Bonds backed by mortgages D) Backed by the U.S. Treasury E) Always offered with a best efforts offering

Collateralized by the earnings from a specific project

The largest component of bond market instruments outstanding in 2004 was comprised of A) T-Bills B) T-Bonds C) Municipal Bonds D) Corporate Bonds E) None of the Above

Corporate Bonds

An investor buys a corporate callable bond at par that has a 6 year maturity. The bond is called after three years at a call price of $1045.12. You reinvested your money for the remaining three years in the same risk level of investment. Which one of thefollowing is true? I. Over the full six years you earned less than the yield rate you were promised when you originally purchased the bond II. At the end of the first three years, interest rates were probably higher than when you bought the bond III. Over the full six years you earned more than the yield rate you were promised when you originally purchased the bond IV. You were able to reinvest the coupons at a higher rate of interest in the last three years than the reinvestment rate you earned in the first three years. A) I only B) III only C) I and II only D) III and IV only E) II and IV only

I only I. Over the full six years, you earned less than the yield rate you were promised when you originally purchased the bond

With respect to private placements of bonds, which of the following is correct? I. Issuers of privately placed bonds tend to be less well known than public bond issues II. Interest rates on privately placed debt tend to be higher than for similar public issues III. Purchasers of privately placed debt have assets of at least $100 million IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity A) I only B) I and III only C) I, II and III only D) I, III and IV only E) I, II, III and IV

I, II, and III only I. Issuers of privately placed bonds tend to be less well known than public bond issues II. Interest rates on privately placed debt tend to be higher than for similar public issues III. Purchasers of privately placed debt have assets of at least $100 million

Which of the following statements about Euro bonds is/are true? I. The issuer chooses the currency of denomination II. Spreads on firm commitment offers are lower for Euro bonds than for U.S. bonds III. Euro bonds typically have denomination of $5,000 and $10,000 IV. Euro bonds are bearer bonds A) I and II only B) I, III and IV only C) II, III and IV only D) II and III only E) I, II, III and IV are true

I, III, and IV only I. The issuer chooses the currency of denomination III. Euro bonds typically have denomination of $5,000 and $10,000 IV. Euro bonds are bearer bonds

Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher required returns than non-callable bonds A) I and II only B) II and IV only C) II and IV only D) I, II, and III only E) I, II, III, and IV are true

II and IV only II. Will normally be called after interest rates drop IV. Have higher required returns than non-callable bonds

The entire contract between the bondholders and bond issuer is called the A) Convenant B) Debenture C) Indenture D) Denture E) Monitor

Indenture

Convertible bonds are A) Bonds that give the bondholder the right to purchase stock at a preset pricewithout giving up the bond B) Bonds in which the issue matures (converts) a little each year C) Bonds collateralized with certain types of automobiles D) Bonds that allow the issuing company to require bondholders to purchase stock inexchange for the bond E) None of the above

None of the above

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a A) STRIP B) T-Note C) T-Bond D) G.O. Bond E) Revenue Bond

STRIP (Separate Trading of Registered Interest & Principal)

Interest income from Treasury securities is _____, and interest income from municipal bonds is always _____. A) Exempt from federal taxes; exempt from all taxes B) Taxable at the state level only; exempt from state taxes only C) Taxable at federal level only; exempt from federal taxes D) Taxable at the state level; taxed at the federal level E) Totally tax exempt; exempt from state taxes

Taxable at federal level only; exempt from federal taxes

"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued. - True - False

True

Accrued interest owed to the bond seller increases as the next coupon payment date approaches. - True - False

True

An institutional investor that pays no taxes and is looking for a bond investment will probably not invest in municipal bonds. - True - False

True

An unsecured bond that has no specific collateral other than the other creditworthiness of the issuing firm is called a debenture. - True - False

True

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds. - True - False

True

Euro bonds are bonds denominated in the issuer's home currency, but are issued outside their home country. - True - False

True

Of the three major sectors of bond issuers, corporations have the greatest dollar value of bonds outstanding. - True - False

True

Bearer bonds are bonds A) With coupons attached that are redeemable by whoever has the bond B) Where the registered owner automatically receives bond payments when scheduled C) In which the issue matures on a series of dates D) Issued in another currency other than the bond issuer's home currency E) Issued in a different country other than the bond issuer's home country

With coupons attached that are redeemable by whoever has the bond