Investments Final Chapter 18

71. A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value? A. $1,043.75 B. $1,250.00 C. $1,481.10 D. $1,500.00 E. $1,652.00 Conversion value = ($1,000/$40) × $41.75 = $1,043.75

A. $1,043.75

51. You just purchased a 5-year STRIPS security that was created from a 30-year T-bond. How many payments will you receive? A. 1 B. 10 C. 11 D. 60 E. 61 See Section 18.4

A. 1

34. Which one of the following statements related to convertible bonds is correct? A. Bondholders forego higher coupon rates in exchange for the conversion option. B. Convertible bonds are generally issued such that the conversion value is equal to the par value. C. The conversion price is equal to the bond's market value divided by the conversion ratio. D. The conversion value is equal to the bond's market price multiplied by the conversion ratio. E. Bonds should be converted as soon as the conversion value exceeds the face value. See Section 18.2

A. Bondholders forego higher coupon rates in exchange for the conversion option.

53. Which of the following statements correctly apply to TIPS? I. They are quoted as a percentage of the current accrued principal. II. They pay a variable interest rate that responds to movements in the inflation rate. III. They are backed by the full faith and credit of the U.S. government. IV. They adjust for inflation on an annual basis. A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. II, III, and IV only See Section 18.4

A. I and III only

68. A bond has a conversion ratio of 24 and a market price of $1,080. If the par value is $1,000, what is the conversion price? A. $40.00 B. $41.67 C. $42.60 D. $43.20 E. $43.80 Conversion price = $1,000/24 = $41.67

B. $41.67

70. A $1,000 par value bond has a market price of $986 and a conversion ratio of 15. The stock is selling for $60.74. What is the conversion value? A. $903.17 B. $911.10 C. $925.60 D. $930.57 E. $946.49 Conversion value = 15 × $60.74 = $911.10

B. $911.10

63. A bond has a conversion price of $47.62, a par value of $1,000, and a market price of $833.40. What is the conversion ratio? A. 20 B. 21 C. 22 D. 23 E. 24 Conversion ratio = $1,000/$47.62 = 21

B. 21

62. A bond has a par value of $1,000 and a market value of $833.40. The conversion price is $45.45. What is the conversion ratio? A. 21 B. 22 C. 23 D. 24 E. 25 Conversion ratio = $1,000/$45.45 = 22

B. 22

35. Which one of the following statements related to convertible bonds is correct? A. Convertible bonds have a maximum value equal to the bond's intrinsic value. B. Convertible bonds have limited downside risk with unlimited upside potential. C. A convertible bond is in-the-money when its call price is greater than its conversion value. D. Convertible bonds must be converted prior to or on the maturity date. E. Convertible bonds must be converted once they are called. See Section 18.2

B. Convertible bonds have limited downside risk with unlimited upside potential.

61. A bond that is currently selling for $933.38 has a conversion price of $40.00. If the par value is $1,000, what is the conversion ratio? A. 23 B. 24 C. 25 D. 26 E. 27 Conversion ratio = $1,000/$40.00 = 25

C. 25

1. Which one of the following best defines a plain vanilla bond? A. bond secured by agricultural or food inventory B. bond with relatively standard features C. unsecured debt D. bond secured with financial collateral E. bond that has no coupon payments See Section 18.1

A. bond secured by agricultural or food inventory

27. A pension fund purchases bonds so that the payments from the bonds provide sufficient cash inflow in a timely manner to offset the cash outflows from the pension fund. What is this investment strategy called? A. cash flow matching B. cash diversification C. cash stabilization D. in-out investing E. plain vanilla matching See Section 18.1

A. cash flow matching

45. Municipal bonds that are secured by the full faith and credit of the issuer are referred to as which one of the following? A. general obligation bonds B. local taxation bonds C. fully funded bonds D. revenue bonds E. private activity bonds See Section 18.7

A. general obligation bonds

37. Which one of the following is another name for a junk bond? A. high-yield B. convertible C. private placement D. subordinated E. called See Section 18.8

A. high-yield

4. Which one of the following is the portion of a prospectus that outlines the contractual terms of a new bond issue? A. indenture summary B. financial disclosure C. covenant agreement D. security agreement E. trust agreement See Section 18.2

A. indenture summary

48. Which one of the following is a taxable municipal bond used to finance a facility used by a private business? A. private activity bond B. private revenue bond C. private corporate bond D. private agency bond E. private income bond See Section 18.7

A. private activity bond

2. Which one of the following terms is defined as debt issued without specific collateral pledged as security? A. unsecured debt B. indenture C. vanilla bond D. naked bond E. risk-free bond See Section 18.1

A. unsecured debt

41. Which one of the following descriptors is used to identify a bond that pays one single payment at maturity? A. zero coupon B. imputed value C. solo D. STRIP E. term See Section 18.4

A. zero coupon

69. A bond has a conversion ratio of 22, a $1,000 par value, and a market price of $1,038. The stock is selling for $46.14. What is the conversion value? A. $1,009.16 B. $1,015.08 C. $1,038.60 D. $1,049.35 E. $1,053.50 Conversion value = 22 × $46.14 = $1,015.08

B. $1,015.08

49. Which of the following features apply to T-bills? I. original maturities of 4, 13, or 26 weeks II. minimum face value of $10,000 III. sold at a discount IV. semiannual interest payments A. IV only B. I and III only C. I and IV only D. II and III only E. II and IV only See Section 18.4

B. I and III only

9. Which one of the following accurately describes bond refunding? A. replacing maturing bonds with a new bond issue B. calling existing bonds and refinancing those bonds with new debt C. paying off bonds early with excess cash generated by the firm D. replacing maturing bonds with an equity issue E. paying bonds off early to satisfy disgruntled bondholders See Section 18.2

B. calling existing bonds and refinancing those bonds with new debt

44. Which one of the following is the risk that a bond issuer will cease paying the interest and principal payments as scheduled? A. interest rate risk B. default risk C. market risk D. conversion risk E. earnings risk See Section 18.7

B. default risk

23. Bonds with relatively high coupons due to their speculative credit ratings are called which one of the following? A. investment-grade bonds B. high-yield bonds C. prudent risk bonds D. floating-rate bonds E. covenant bonds See Section 18.8

B. high-yield bonds

39. What is the interest on a Treasury bill called when it is determined by the size of the bill's discount from face value? A. assumed interest B. imputed interest C. imaginary interest D. convergent interest E. original-issue interest See Section 18.4

B. imputed interest

25. Which one of the following parties is the largest holder of U.S. corporate bonds? A. pension funds B. life insurance companies C. banks D. foreign investors E. individual investors See Section 18.1

B. life insurance companies

5. What is the document called that is distributed to potential bondholders and provides detailed information on the financial position and operations of the bond issuer? A. indenture summary B. prospectus C. trust statement D. 10K E. 10Q See Section 18.2

B. prospectus

17. Which one of the following is an account used to provide for scheduled redemptions of outstanding bonds? A. redemption fund B. sinking fund C. liquidation account D. serial account E. callable account See Section 18.2

B. sinking fund

64. What is the conversion ratio of a $1,000 par value bond that is selling for $888.96 and has a conversion price of $58.82? A. 15 B. 16 C. 17 D. 18 E. 19 Conversion ratio = $1,000/$58.82 = 17

C. 17

36. Which one of these statements regarding corporate bond credit ratings is correct? A. Bonds rated Ba3 or above by Moody's are considered investment-grade bonds. B. All bonds issued by the same issuer will have the same credit rating. C. A bond's credit spread may be a better indicator of a bond's risk than its rating. D. Bond ratings are based solely on the seniority of the bond issue and the protective covenants by which it is covered. E. Credit ratings are assigned to the bond issuer, not the bond issue. See Section 18.8

C. A bond's credit spread may be a better indicator of a bond's risk than its rating.

52. Which one of the following statements related to TIPS is correct assuming an inflationary environment? A. TIPS have a maturity value of $1,000. B. TIPS pay an interest payment based on the latest T-bill rate. C. TIPS pay a fixed coupon rate. D. The principal amount of a TIPS is adjusted annually for inflation. E. The interest rate is adjusted semiannually for inflation. See Section 18.4

C. TIPS pay a fixed coupon rate.

32. After the call protection period, which one of the following basically serves as the upper price limit on a callable bond? A. present value of all future bond payments discounted at the current market rate of interest B. face value of the bond C. call price of the bond D. current market price of the bond E. current market price of a comparable noncallable bond See Section 18.2

C. call price of the bond

21. Which one of the following is an assessment of the credit quality of a bond based on the financial condition of the bond issuer? A. protective covenant B. risk analysis C. credit rating D. serial report E. in-the-money status See Section 18.8

C. credit rating

38. What is the method of selling Treasury bills at less than face value called? A. imputed basis B. par value method C. discount basis D. STRIP basis E. face value method See Section 18.4

C. discount basis

14. What is a bond called if it can be converted into shares of stock of a firm other than the bond issuer? A. swap bond B. alternate bond C. exchangeable bond D. convertible bond E. callable bond See Section 18.2

C. exchangeable bond

57. Kathy lives in State A and owns a municipal bond issued by State B. The interest earned on this bond is most apt to be exempt from taxation at which of the following levels? A. local only B. state only C. federal only D. local and state only E. federal, state, and local See Section 18.7

C. federal only

58. Which one of the following generally applies to municipal bonds? A. noncallable B. risk-free C. high credit rating D. zero coupon E. par value of $1,000 See Section 18.7

C. high credit rating

47. Which one of the following is a municipal bond that is secured by both the revenues from a project and also by the taxing authority of the municipality? A. mixed bond B. general obligation bond C. hybrid bond D. dual bond E. multiple bond See Section 18.7

C. hybrid bond

29. The entire formal contract between a bond issuer and the bondholders is found in which one of the following documents? A. prospectus B. prospectus summary C. indenture agreement D. indenture summary E. trust certificate See Section 18.2

C. indenture agreement

59. A moral obligation bond is which type of a bond? A. municipal revenue B. municipal GO C. municipal hybrid D. U.S. Treasury E. U.S. agency See Section 18.7

C. municipal hybrid

22. What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called? A. protective covenants B. negative restrictions C. prudent investment guidelines D. safety monitors E. risk ranges See Section 18.8

C. prudent investment guidelines

10. Which one of the following provisions grants the bondholder the option of selling the bond back to the issuer at a prespecified price on prespecified dates? A. convertible B. call C. put D. exchange E. sinking fund See Section 18.2

C. put

16. Bonds issued with a regular sequence of maturity dates are called which one of the following? A. callable bonds B. sequential bonds C. serial bonds D. sinking bonds E. put bonds See Section 18.2

C. serial bonds

43. What is the lowest accepted competitive bid in a U.S. Treasury auction called? A. selected price B. base price C. stop-out bid D. imputed bid E. set bid See Section 18.5

C. stop-out bid

55. What price will a noncompetitive bidder pay for a security being purchased through a U.S. Treasury auction? A. highest competitive bid price B. highest noncompetitive bid price C. stop-out bid price D. average of all bid prices E. lowest competitive bid price See Section 18.5

C. stop-out bid price

31. How much will you be paid if you own a bond that is called under a make-whole call provision? A. the face value B. an amount equal to the par value plus the total amount of the remaining interest payments C. the present value of all future bond payments that will not be paid because of the call D. the current market value plus a prespecified call premium E. an amount equal to the normal maturity value of the bond See Section 18.2

C. the present value of all future bond payments that will not be paid because of the call

67. A bond is currently priced at $1,076.88 and has a par value of $1,000. If the conversion ratio is 25, what is the conversion price? A. $35.71 B. $36.92 C. $38.46 D. $40.00 E. $41.67 Conversion price = $1,000/25 = $40.00

D. $40.00

65. A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 19, what is the conversion price? A. $43.48 B. $45.45 C. $47.62 D. $52.63 E. $55.56 Conversion price = $1,000/19 = $52.63

D. $52.63

54. Which one of the following applies to U.S. Treasury auctions? A. Every bidder has a choice of submitting either a competitive or a noncompetitive bid. B. The purchase price paid by all bidders is the highest bid price. C. Each bidder with an accepted bid will pay the individual price he or she bid. D. All noncompetitive bids are accepted automatically. E. Noncompetitive bids are ignored unless there are not enough competitive bids to buy the entire issue. See Section 18.5

D. All noncompetitive bids are accepted automatically.

30. Which one of the following statements related to callable bonds is correct? A. Callable bonds are issued at the call price. B. Callable bonds can be called at any time. C. Callable bonds are generally called at the market price at the time of the call. D. Callable bonds are more apt to be called if market interest rates decline. E. Callable bonds are generally priced higher than comparable noncallable bonds. See Section 18.2

D. Callable bonds are more apt to be called if market interest rates decline.

19. Which one of the following identifies a new bond issue as being a private placement? A. The proceeds of the issue are used for a single project. B. The issue is marketed through a sole brokerage house. C. The issue is sold only to individuals rather than to institutional investors. D. The issue is not made available to the public. E. The issue names a private individual as the bond trustee. See Section 18.2

D. The issue is not made available to the public.

33. Which one of the following statements related to a put bond is correct? A. Put bonds are generally redeemed at a premium over par value. B. Put bonds can be redeemed at any time once the put protection period has elapsed. C. The put feature effectively sets the ceiling price for the bond. D. The put feature helps protect bondholders from the risk associated with rising interest rates. E. A putable bond is generally priced lower than a comparable nonputable bond. See Section 18.2

D. The put feature helps protect bondholders from the risk associated with rising interest rates.

50. Which one of the following statements applies to U.S. Treasury bonds? A. They have original maturities of 1 to 10 years. B. They have a minimum face value of $100,000. C. They are zero-coupon securities. D. They pay a fixed coupon payment semiannually. E. They are adjusted semiannually for inflation. See Section 18.4

D. They pay a fixed coupon payment semiannually.

15. Term bonds are defined as all bonds in a bond issue having which one of the following characteristics? A. sequential maturity dates B. serial maturity dates C. multiple maturity dates D. an identical maturity date E. renewable maturity dates See Section 18.2

D. an identical maturity date

42. Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell? A. commission B. imputed cost C. imputed interest D. bid-ask spread E. ask price See Section 18.4

D. bid-ask spread

11. Which one of the following provisions grants the bondholder the option of exchanging a bond for a prespecified number of shares of stock of the same issuer? A. put B. call C. equity D. conversion E. sinking See Section 18.2

D. conversion

3. Which one of the following is an unsecured bond issued by a corporation? A. indenture B. general obligation bond C. plain vanilla bond D. debenture E. trust bond See Section 18.1

D. debenture

18. What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called? A. restrictive actions B. prohibitions C. negative conditions D. protective covenants E. restrictive amendments See Section 18.2

D. protective covenants

6. Which one of the following is an unsecured bond that has a higher claim on a firm's assets than other unsecured bonds? A. plain vanilla bond B. subordinated debenture C. refunded bond D. senior debenture E. collateral trust bond See Section 18.2

D. senior debenture

7. During a bankruptcy proceeding, Bond A will be paid only if funds remain after the bonds that have a higher claim on the issuer's assets have been paid. What type of bond is Bond A? A. plain vanilla bond B. senior trust bond C. junior trust bond D. subordinated debenture E. senior debenture See Section 18.2

D. subordinated debenture

66. A convertible bond has a par value of $1,000, a market value of $875, and a conversion ratio of 14. What is the conversion price? A. $55.56 B. $58.82 C. $62.50 D. $66.67 E. $71.43 Conversion price = $1,000/14 = $71.43

E. $71.43

28. Which of the following features would you expect a plain vanilla bond to have? I. semi-annual coupon payments II. $1,000 face value III. stated maturity date IV. multiple bonds within one issue A. I and II only B. II and III only C. II, III, and IV only D. I, II, and III only E. I, II, III, and IV See Section 18.1

E. I, II, III, and IV

24. Which of the following are common characteristics associated with corporate bonds? I. specified cash flows II. equity ownership III. call feature IV. set maturity date A. I and II only B. I and IV only C. II and III only D. I, II, and IV only E. I, III, and IV only See Section 18.1

E. I, III, and IV only

60. Which of the following uses of proceeds from private activity bonds will most likely qualify those bonds as federally tax-exempt? I. public airport runway II. baseball stadium III. multifamily housing project IV. mass rail transit A. I and II only B. I and III only C. II and III only D. II and IV only E. I, III, and IV only See Section 18.7

E. I, III, and IV only

40. Which one of the following is the Treasury program allowing interest and principal payments from Treasury notes or bonds to be sold separately? A. EDGAR B. TRSTRP C. TRIPS D. TZEROES E. STRIPS See Section 18.4

E. STRIPS

20. Adjustable-rate bonds are identified by which one of the following characteristics? A. The coupon rate will increase should the credit rating of the bond decline. B. Different bonds within the same issue have different coupon rates. C. Bondholders can defer coupon payments at their discretion. D. The amount of each coupon payment will depend on the free cash flow of the issuer. E. The coupon rate changes in response to changes in current market rates. See Section 18.2

E. The coupon rate changes in response to changes in current market rates.

12. Which one of the following defines an in-the-money bond? A. secured bond with collateral value that exceeds the bond's price B. callable bond with a call price that exceeds the current market price C. put bond with a put price that exceeds the current market price D. convertible bond with a call price that exceeds its conversion value E. convertible bond with a conversion value that exceeds its call price See Section 18.2

E. convertible bond with a conversion value that exceeds its call price

13. Which one of the following terms is given to the value of a convertible bond that would equate to the value of a comparable nonconvertible bond? A. out-of-the money value B. in-the-money value C. discounted value D. external value E. intrinsic value See Section 18.2

E. intrinsic value

8. Which one of the following is the clause which prevents a bond issuer from issuing new debt that has seniority over current debt? A. first-in-line B. sinking fund C. call provision D. affirmation E. negative pledge See Section 18.2

E. negative pledge

26. Which one of the following features of corporate bonds has the greatest appeal to pension fund investors? A. call provision B. convertible provision C. zero repayment risk D. prospectus availability E. predictable cash flows See Section 18.1

E. predictable cash flows

46. Which one of the following is a municipal bond that is secured by the income collected from a specific project? A. agency bond B. general obligation bond C. development bond D. contingency bond E. revenue bond See Section 18.7

E. revenue bond

56. U.S. government agency bonds pay interest which is subject to which of the following taxes? A. federal only B. state only C. state and local only D. state and federal only E. state, local, and federal See Section 18.6

E. state, local, and federal