Investments Ch. 10

10. A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond selling above or below par value? Above par value Below par value

Below par value

7. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio a. II and III only b. I only c. I, II, and III d. I and III only

a. II and III only

34. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? a. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. b. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. c. Neither bond is a Eurobond. d. Both bonds are examples of Eurobonds.

a. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

25. The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. a. current yield b. nominal yield c. yield to call d. yield to maturity

a. current yield

38. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher

a. longer; lower

33. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. a. none of these options (The liquidity preference theory cannot be used to make any of the other statements.) b. a higher yield on long-term bonds than on short-term bonds c. a higher yield on short-term bonds than on long-term bonds d. the same yield on both short-term bonds and long-term bonds

b. a higher yield on long-term bonds than on short-term bonds

37. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) a. capital gain; capital loss b. capital loss; capital gain c. capital gain; capital gain d. capital loss; capital loss

b. capital loss; capital gain

20. The primary difference between Treasury notes and bonds is ________. a. tax status b. maturity at issue c. default risk d. coupon rate

b. maturity at issue

15. Bonds rated _____ or better by Standard & Poor's are considered investment grade. a. CCC b. BB c. BBB d. AA

c. BBB

5. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. a. Yankee bonds b. foreign bonds c. Eurobonds d. Samurai bonds

c. Eurobonds

23. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity a. I only b. I and II only c. I, II, and III d. II only

c. I, II, and III

30. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. a. an expectation of an upcoming recession b. a decline in future inflation expectations c. an increase in expected interest rate volatility d. declining liquidity premiums

c. an increase in expected interest rate volatility

44. A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. a. puttable b. Treasury c. callable d. coupon

c. callable

13. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. a. intermediate grade b. high grade c. junk bonds d. investment grade

c. junk bonds

26. You can be sure that a bond will sell at a premium to par when _________. a. its coupon rate is equal to its yield to maturity b. its coupon rate is less than its yield to maturity c. its coupon rate is less than its conversion value d. its coupon rate is greater than its yield to maturity

d. its coupon rate is greater than its yield to maturity

42. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. a. slightly higher than b. twice as high as c. identical to d. lower than

d. lower than

14. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. a. coupon b. Treasury c. callable d. puttable

d. puttable

2. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. a. call protection b. marketability c. risk d. taxation

d. taxation