Finance 300 Practice Questions Chapter 7 (No Math)

** Which bond would you generally expect to have the highest yield? A. Risk-free Treasury bond B. Non-taxable, highly-liquid bond C. Long-term, high-quality, tax-free bond D. Short-term, inflation-adjusted bond E. Long-term, taxable junk bond

E

A bond that is payable to whomever has physical possession of the bond is said to be in A. New-issue condition. B. Registered form. C. Bearer form. D. Debenture status. E. Collateral status.

C

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. What is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued. B. The bond is worth less today than when it was issued. C. The yield-to-maturity is less than the coupon rate. D. The coupon rate is greater than the current yield. E. The yield-to-maturity equals the current yield.

C

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than

C

Bonds issued by the U.S. government: A. Are considered to be free of interest rate risk. B. Generally have higher coupons than comparable bonds issued by a corporation. C. Are considered to be free of default risk. D. Pay interest that is exempt from federal income taxes. E. Are called "munis."

C

The pure time value of money is known as the: A. Liquidity effect. B. Fisher effect. C. Term structure of interest rates. D. Inflation factor. E. Interest rate factor.

C

Which risk premium compensates for the inability to easily resell a bond prior to maturity? A. Default risk. B. Taxability. C. Liquidity. D. Inflation. E. Interest rate risk.

C

** A Treasury Yield Curve plots Treasury Interest Rates relative to: A. Market rates. B. Comparable corporate bond rates. C. The risk-free rate. D. Inflation. E. Maturity.

E

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: A. Dirty price. B. Redemption value. C. Call premium. D. Original-issue discount. E. Redemption discount.

C

** Real rates are defined as nominal rates that have been adjusted for: A. Inflation. B. Default risk. C. Accrued interest. D. Interest rate risk. E. Both inflation and interest rate risk.

A

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: A. .05 / (1 - t*) = .07. B. .05 - (1 - t*) = .07. C. .07 + (1 - t*) = .05. D. .05 × (1 - t*) = .07. E. .05 × (1 + t*) = .07.

A

What risk premium is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default risk. B. Taxability. C. Liquidity. D. Inflation. E. Interest rate risk

A

** Formula for Accrued Interest

Accrued Interest = Coupon Amount x (Days Since Last Coupon Payment / Days in Current Coupon Period)

A bond is quoted at a price of $1,011. This price is referred to as the: A. Call price. B. Face value. C. Clean price. D. Dirty price. E. Maturity price.

C

A bond that can be paid off early at the issuer's discretion is referred to as being: A. Par value. B. Callable. C. Senior. D. Subordinated. E. Unsecured.

B

A sinking fund is managed by a trustee for what purpose? A. Paying bond interest payments. B. Early bond redemption. C. Converting bonds into equity securities. D. Paying preferred dividends. E. Reducing bond coupon rates.

B

U. S. Treasury bonds: A. Are highly illiquid. B. Are quoted as a percentage of par. C. Are quoted at the dirty price. D. Pay interest that is federally tax-exempt. E. Must be held until maturity.

B

** Formula for Current Yield

Current Yield = Annual Coupon / Price

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent. B. Greater than 3.5 percent but less than 7 percent. C. 7 percent. D. Greater than 7 percent. E. Less than 3.5 percent.

D

A note is generally defined as: A. A secured bond with an initial maturity of 10 years or more. B. A secured bond that initially matures in less than 10 years. C. Any bond secured by a blanket mortgage. D. An unsecured bond with an initial maturity of 10 years or less. E. Any bond maturing in 10 years or more.

D

The Taxability Risk Premium compensates bondholders for: A. Yield decreases in response to market changes. B. Lack of coupon payments. C. Possibility of default. D. A bond's unfavorable tax status. E. Decrease in a municipality's credit rating.

D

Callable bonds generally: A. Grant the bondholder the option to call the bond anytime after the deferment period. B. Are callable at par as soon as the call-protection period ends. C. Are called when market interest rates increase. D. Are called within the first three years after issuance. E. Have a sinking fund provision.

E

Interest rates that include an inflation premium are referred to as: A. Annual percentage rates. B. Stripped rates. C. Effective annual rates. D. Real rates. E. Nominal rates.

E

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of: A. Note. B. Discounted. C. Zero-coupon. D. Callable. E. Debenture.

E

Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues. B. Only apply to privately issued bonds. C. Are a feature found only in government-issued bond indentures. D. Only apply to bonds that have a deferred call provision. E. Are primarily designed to protect bondholders.

E

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: A. Trustee relationships. B. Bylaws. C. Legal bounds. D. Trust deed. E. Protective covenants.

E

Which one of the following statements is correct? (Just memorize this one) A. The risk-free rate represents the change in purchasing power. B. Any return greater than the inflation rate represents the risk premium. C. Historical real rates of return must be positive. D. Nominal rates exceed real rates by the amount of the risk-free rate. E. The real rate must be less than the nominal rate given a positive rate of inflation.

E

** Formula for Yield to Maturity

Yield to Maturity = Current Yield + Capital Gains Yield