Finance ch 6

dirty price

What is the price that an investor pays to purchase an outstanding bond?

Limiting cash dividends to $1 per share or less

What might be included in a bonds list of negative covenants?

Taxability premium

What premium is paid on a corporate bond due to its tax status?

Decrease in the time to maturity and an increase in the coupon rate

What combination is ensured to decrease the interest rate sensitivity of a bond?

Highly compensated business owner

What individual is most apt to purchase a municipal bond?

Coupon payments are dependent on the issuers income.

What is a unique characteristic of an income bond?

protect the lender

What is the primary purpose of bond covenants?

Face value

What is the principal amount of a bond that is repaid at the end of the loan term called?

Clean price

What is the quoted price of a bond?

Nominal rate

What is the rate of return an investor earns on a bond before adjusting for inflation?

Liquidity premium

What provides compensation to a bondholder when a bond is not readily marketable at its full value?

Fisher effect

What refers to the relationship between nominal returns, real returns, and inflation?

Default risk premium

What represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Zero coupon

What term applies to a bond that initially sells at a deep discount and pays no interest payments?

Debenture

What term denotes for certain that a bond is unsecured?

sinking fund

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Yield to maturity

What term refers to a bonds rate of return that is required by the marketplace?

CAT

What type of bond permits its issuer to forego paying interest payments if certain natural events cause significant losses?

TIPS

What type of bond should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

is selling at a premium

When a bonds yield to maturity is less than the bonds coupon rate, the bond:

Annual interest payment

When you refer to a bonds coupon, you are referring to what?

I, III, and IV only

Which of the following can generally be found in a bonds indenture agreement? I. Terms of repayment II. Names of registered shareholders III. Protective covenants IV. Total amount of the bond issue

I and IV only

Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.? I. Registered form II. Bearer form III. Quarterly coupon payments IV. Semiannual coupon payments

II, III, and IV only

Which of the following ratings indicate that a bond is low quality? I. Baa II. BB III. B IV. Ba

treasury bill

Which one of the following bonds is most apt to have the smallest liquidity premium?

D. 8 percent annual coupon, 4 year

Which one of the following bonds is the least sensitive to changes in market interest rates? A. Zero coupon, 10 year B. 6 percent annual coupon, 10 year C. Zero coupon, 4 year D. 8 percent annual coupon, 4 year E. 6 percent annual coupon, 4 year

nominal return

The R in the Fisher effect formula represents the:

coupon bonds yield to maturity to decrease.

An unexpected decrease in market interest rates will cause a:

the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

An upward-sloping term structure of interest rates indicates:

put provision

A "floater" bond frequently has a:

note

A _____________ is an unsecured debt that is generally payable within the next 10 years.

callable bond

A __________________ may be structured to pay bondholders the current value of the bond on the date of call.

protective covenant

A ____________________ limits the actions of the borrower.

asked; bid

A bond dealer sells at the _____ price and buys at the _____ price.

debenture

A bond for which no specific property has been pledged as security is classified as a:

call price is inversely related to the market rate of interest.

A bond has a make-whole call provision. Given this, you know that the:

bid-ask spread

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

option of repurchasing the bonds prior to maturity at a prespecified price

A call provision grants the bond issuer the:

inflation

A real rate of return is defined as a rate that has been adjusted for _____________.

interest rate risk premium

Changes in interest rates affect bond prices. What compensates bond investors for this risk?

deferred call

Dexter, Inc. has a bond issue outstanding. The issues indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

semiannual

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

downward sloping

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

humped

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

5B

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

Fallen angel

Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. What term applies to this situation?

debenture

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

generally callable

Municipal bonds are:

Maturity date

On what date is the principal amount of a bond repaid?

call protected.

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

liquidity premium

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bonds yield will be affected by the fact that no active secondary market is expected for these bonds?

maturity

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.

inflation premium

The ___________________ compensates investors for expected price increases.

coupon rate

The annual interest divided by the face value of a bond is referred to as the:

call price exceeds the par value.

The call premium is the amount by which the:

Current market price

The current yield on a bond is equal to the annual interest divided by:

Baa

The lowest rating a bond can receive from Moodys and still be classified as an investment- quality bond is:

bid

The price at which a dealer will purchase a bond is called the _____ price.

asked

The price at which an investor can purchase a bond from a dealer is called the _____ price.

protect bondholders from issuer actions.

The primary purpose of protective covenants is to help:

I, II, and IV only

The term structure of interest rates is affected by which of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium

Nominal rates on default-free, pure discount bonds and time to maturity

The term structure of interest rates represents the relationship between what

coupon rate and the yield to maturity.

The value of a bond is dependent on the:

Indenture

The written agreement that contains the specific details related to a bond issue is called the bond:

greater than both the current yield and the coupon rate.

The yield to maturity on a discount bond is:

Bearer form bond

This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and interest payment. The bond that Jeff found must have been what?

D. Sinking funds may be used to purchase bonds in the open market.

Which one of the following statements concerning sinking funds is correct? A. Bond issuers must fund a sinking fund at the time the bonds are issued. B. Sinking funds must include at least one "balloon payment" C. Sinking funds must be funded annually, starting on the issue date. D. Sinking funds may be used to purchase bonds in the open market. E. Sinking funds can be used only to call bonds.

E. Investors in MBSs are subject to real estate deflation risk.

Which one of the following statements is correct regarding mortgage-backed securities (MBSs)? A. There is a separate MBS for each individual mortgage processed by a mortgage broker. B. An MBS is a type of debenture. C. The originating bank is the seller of MBSs to investors. D. Investors in MBSs are protected from default. E. Investors in MBSs are subject to real estate deflation risk.

D. Bond markets are dealer based.

Which one of the following statements is correct? A. Bond markets have less daily trading volume than equity markets. B. There are fewer bond issues than there are equity issues. C. Municipal bond prices are highly transparent. D. Bond markets are dealer based. E. Most bond trades occur on the NYSE.

C. An indenture is a contract between a bonds issuer and its holders.

Which one of the following statements is correct? A. Bonds are generally called at par value. B. A current list of all bondholders is maintained whenever a firm issues bearer bonds. C. An indenture is a contract between a bonds issuer and its holders. D. Collateralized bonds are called debentures. E. A bondholder has the right to determine when his or her bond is called.

E. A discount bond has a coupon rate that is less than the bonds yield to maturity.

Which one of the following statements is true? A. The current yield on a par value bond will exceed the bonds yield to maturity. B. The yield to maturity on a premium bond exceeds the bonds coupon rate. C. The current yield on a premium bond is equal to the bonds coupon rate. D. A premium bond has a current yield that exceeds the bonds coupon rate. E. A discount bond has a coupon rate that is less than the bonds yield to maturity.

Fallen angel

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?

registered form bond

a bond that pays coupon payments directly to the owner of record

zero coupon bonds

create annual taxable income to individual bondholders