finance exam 2

90. Junk bonds are those bonds with a credit rating of _____________. A. BB and lower B. B and lower C. BBB and lower D. None of these.

A. BB and lower

103. Which of the following statements is correct? A. Bonds with short-term maturities will have very little interest rate risk. B. Bonds with large coupon payments will have very little interest rate risk. C. Bonds with higher credit ratings will have very little interest rate risk. D. All of these statements are correct.

A. Bonds with short-term maturities will have very little interest rate risk

67. Which of the following is not true about EE savings bonds? A. Interest payments are received annually but are tax deductible. B. About 1 in 6 Americans own a savings bond C. These are tax deferred investments D. Patriot bonds sell for one-half of their face value.

A. Interest payments are received annually but are tax deductible

114. If a bond is selling at a discount, which of the following statements is correct? A. The current yield must be greater than the coupon rate. B. The coupon rate must be greater than the yield to maturity. C. The bond must have a low bond rating. D. All of the statements are correct.

A. The current yield must be greater than the coupon rate

109. Which of the following statements is correct? A. There is an inverse relationship between bond prices and bond yields. B. There is a positive relationship between bond prices and bond yields. C. There is no relationship between bond prices and bond yields. D. The relationship between bond prices and bond yields is dependent on the market interest rate.

A. There is an inverse relationship between bond prices and bond yields.

11. Which of the following issues Treasury Inflation Protected Securities (TIPS)? A. U.S. Treasury B. Corporations C. Municipalities D. Nonprofits

A. U.S. Treasury

13. Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans? A. asset-backed securities B. credit quality securities C. debentures D. junk bonds

A. asset-backed securities

23. Which of the following terms is the chance that the bond issuer will not be able to make timely payments? A. credit quality risk B. interest rate risk C. liquidity of interest rate risk D. term structure of interest rates

A. credit quality risk

110. If a bond is selling at a premium, then ________________________________. A. its coupon rate must be greater than its yield B. its coupon rate must be less than its yield C. its coupon rate must be equal to its yield D. its coupon rate must be equal to one-half the yield to maturity for a 5-year bond

A. its coupon rate must be greater than its yield

2. Bonds are issued by which of the following? A. corporations B. federal government or its agencies C. state and local governments D. all of these

All of them

9. Which of the following are main issuers of bonds? A. U.S. Treasury bonds B. Corporate bonds C. Municipal bonds D. All of these

All of them

107. Which of the following statements is correct? A. All else the same, an investor will require less return to invest in a callable bond than one that is not callable. B. All else the same, an investor will require more return to invest in a callable bond than one that is not callable. C. The call feature does not impact the return that investors demand. D. We would need to know the current level of interest rates to answer this question.

B. All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

92. Investment grade bonds include those bonds with ratings _____________. A. From AAA to BB B. From AAA to BBB C. From AAA to B D. From AAA to A

B. From AAA to BBB

104. Which of the following statements is correct? A. Long-term bonds have more reinvestment rate risk than short-term bonds. B. Long-term bonds have more interest rate risk than short-term bonds. C. Short-term bonds with high coupons have high interest rate risk. D. Zero coupon bonds do not have interest rate risk.

B. Long-term bonds have more interest rate risk than short-term bonds.

116. To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued ______________. A. Trust securities B. Mortgage-backed securities C. Current yield securities D. Treasury Inflation Protected Securities

B. Mortgage-backed securities

108. Under which conditions will an investor demand a larger return (yield) on a bond? A. The bond issue is upgraded from A to AA. B. The bond issue is downgraded from A to BBB. C. Interest rates decrease due to decline in inflation. D. None of these conditions will cause an increase in the bond's yield.

B. The bond issue is downgraded from A to BBB.

12. Which of the following is true regarding U.S. Government Agency Securities? A. They carry the federal government's full faith and credit guarantee. B. They do not carry the federal government's full faith and credit guarantee. C. They are insured by the FDIC. D. They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee.

B. They do not carry the federal government's full faith and credit guarantee

6. To compensate the bondholders for getting the bond called, the issuer pays which of the following? A. call feature B. call premium C. coupon rate D. original issue premium

B. call premium

17. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments? A. credit quality risk B. interest rate risk C. liquidity rate risk D. reinvestment rate risk

B. interest rate risk

8. Bond prices are quoted in terms of which of the following? A. original issue discount B. percent of par value C. coupon rate in dollars D. market rate in dollars

B. percent of par value

91. Which of following are backed only by the reputation and financial stability of the corporation? A. Debentures B. Unsecured bonds C. Both a and b D. None of these.

C. Both a and b

115. If a bond is selling at par value, which of the following statements is correct? A. The current yield must equal the coupon rate. B. The current yield must equal the yield to maturity. C. Both of these statements are correct. D. None of these statements is correct.

C. Both of these statements are correct.

111. The bond's annual coupon rate divided by its market price is referred to as the __________. A. Yield to Call B. Yield to Maturity C. Current Yield D. Term Structure of Interest Rates

C. Current Yield

66. Which of the following was the catalyst for the recent financial crisis? A. Corruption in the investment banking industry. B. Widespread layoffs due to illegal alien hiring. C. Defaults on subprime mortgages. D. All of these.

C. Defaults on subprime mortgages.

117. Under what conditions is a bond likely to be called? A. The firm is in financial duress. B. The firm is planning a massive expansion and needs to raise a lot of capital. C. Interest rates have significantly declined. D. The firm wants to increase its debt ratio.

C. Interest rates have significantly declined.

100. All of the following items would need to be included in the bond's indenture agreement except _____. A. The coupon rate B. The call feature C. The credit rating D. Steps that the bondholder can take in the event that the issuer fails to pay the interest or principal

C. The credit rating

94. Which of the following statements is correct? A. Yield spreads between bonds of different quality remain static over time. B. Yield spreads are set by the Securities Exchange Commission. C. Yield spreads between bonds of different quality change over time. D. None of these statements is correct.

C. Yield spreads between bonds of different quality change over time

7. This determines the dollar amount of interest paid to bondholders. A. original issue discount B. call premium C. coupon rate D. market rate

C. coupon rate

5. Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay? A. call premium B. maturity date C. par or face value D. time to maturity value

C. par or face value

20. A bond's current yield is defined as A. the bond's annual coupon rate divided by the bond's par value. B. the bond's annual coupon rate divided by the market interest rate. C. the bond's annual coupon rate divided by the bond's current market price. D. the bond's annual coupon rate divided by the bond's original issue price.

C. the bond's annual coupon rate divided by the bond's current market price.

14. Which of the following is NOT a factor that determines the coupon rate of a company's bonds? A. The amount of uncertainty about whether the company will be able to make all the payments. B. The term of the loan. C. The level of interest rates in the overall economy at the time. D. All of these are factors that determine the coupon rate of a company's bonds.

D. All of these are factors that determine the coupon rate of a company's bonds.

93. Which of the following statements is correct? A. Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. B. Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. C. Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. D. All of these statements are correct.

D. All of these statements are correct

101. Which of the following is not a correct statement? A. Treasury inflation-protected securities have fixed coupon rates. B. The federal government adjusts the par value of Treasury inflation-protected securities at the rate of inflation. C. At maturity, investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount. D. All of these statements are correct.

D. All of these statements are correct.

1. Which of these statements is false? A. Bonds are more important capital sources than stocks for companies and governments. B. Some bonds offer high potential for rewards and, consequently, higher risk. C. The bond market is larger than the stock market. D. Bonds are always less risky than stocks.

D. Bonds are always less risky than stocks.

16. Which of the following is a true statement? A. If interest rates fall, U.S. Treasury bonds will have decreasing values. B. If interest rates fall, corporate bonds will have decreasing values. C. If interest rates fall, no bonds will enjoy rising values. D. If interest rates fall, all bonds will enjoy rising values.

D. If interest rates fall, all bonds will enjoy rising values

10. Which of the following statements is true? A. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. B. Interest payments paid to corporate bond holders are not taxed at the federal level. C. Interest payments paid to corporate bond holders are not taxed at the state level. D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

68. If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true? A. The current bond price will increase. B. Interest rates required on new bond issues will increase. C. The current bond price will decrease. D. The current bond price will increase and interest rates on new bonds issues will decrease

D. The current bond price will increase and interest rates on new bonds issues will decrease.

21. Which of the following is an important advantage to the issuer of a bond with a call provision? A. They are able to avoid interest rate risk. B. They are able to avoid reinvestment rate risk. C. They are able to reduce their credit risk. D. They allow for refinancing opportunities.

D. They allow for refinancing opportunities

22. Which of the following is a reason municipal bonds offer lower rates of interest income for their investors? A. They are able to avoid interest rate risk. B. They are able to avoid reinvestment rate risk. C. They are able to offer reduced credit risk as they are backed by the federal government. D. They are tax exempt—at least at the federal level.

D. They are tax exempt—at least at the federal level

102. Which of the following would NOT be an example of an agency bond? A. Federal Home Loan Bank bond B. Student Loan Marketing Association bond C. Fannie Mae bond D. Treasury bills

D. Treasury bills

113. Possible shapes for the yield curve include all of the following except ___________. A. Upward sloping B. Humped C. Horizontal line D. Vertical line

D. Vertical line

24. Which of the following bonds carry significant risk that the issuer will not make current or future payments? A. credit quality risk bonds B. interest rate risk bonds C. liquidity rate risk bonds D. junk bonds

D. junk bonds

18. Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate? A. credit quality risk B. interest rate risk C. liquidity rate risk D. reinvestment rate risk

D. reinvestment rate risk

19. Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same? A. credit quality risk B. interest rate risk C. liquidity of interest rate risk D. term structure of interest rates

D. term structure of interest rates

15. Which of the following bonds makes no interest payments? A. a bond whose coupon rate is equal to the market interest rates B. a bond whose coupon rates are greater than market interest rates C. a bond whose coupon rates are less than the market interest rates D. zero coupon bond

D. zero coupon bond

4. Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder? A. debenture B. enforcement codes C. indenture D. prospectus

Indenture

3. Which of these statements answers why bonds are known as fixed income securities? A. Many investors on fixed incomes buy them. B. Investors know how much they will receive in interest payments. C. Investors will not receive their principal when the bond's term is up. D. All of these

all of them