bonds quizez
10 basis points equals:
.1% One basis point equals .01% movement in interest rates, so 10 basis points equals a .1% movement in interest rates.
Which of the following would be a quote for a U.S. Government bond with a dollar price of $1,012.50?
101-8 U.S. Government bonds are quoted on a percentage of par basis in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond. Choice C is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.
In 2019, a customer buys 5 GE 10% debentures, M '39 at 150. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2029 at 103. The current yield on the bonds is:
6.7%
Which of the following would be a quote for a manufacturing company bond?
99 1/2
most corporate, government, and any municipal issues which are term bonds
Are quoted on a percentage of par basis. Anytime a bond is quoted as a percentage of par, it is quoted on a dollar basis. In contrast, municipal serial issues are quoted on a yield basis.
What will not affect the marketability of a corporate bond?
Bond denominations
During periods when interest rates are rising, which statement is TRUE?
Bonds with low coupon rates exhibit the greatest price volatility When rates rise, bond prices fall. Bonds with the lowest price volatility will be ones with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility, with the most volatile bond being a zero-coupon bond. Thus, to minimize price volatility due to interest rate movements ("interest rate risk"), high coupon bonds are more appropriate than low coupon bonds.
If interest rates are rising, which statement about discount and premium bonds is TRUE?
Discount bonds will depreciate faster than premium bonds As a general rule, the longer the maturity on a debt issue, the greater the issue's price volatility in response to interest rate movements. Another general rule is that the lower the price of the issue (which would result from having a lower coupon), the greater the issue's price volatility in response to interest rate movements. As interest rates rise, bonds that are selling at a discount will fall proportionately more than bonds trading at an equivalent premium. This is true since the change in price as a percentage of the bond's cost is greater for a discount bond than for a premium bond.
Corporate bonds are quoted on what basis?
Dollar price aka term bonds and are quoted on a percentage of par basis
Which statement is TRUE regarding bond price volatility?
High coupon, short maturity bonds have the lowest price volatility The shorter the maturity, the lower the bond's price volatility in response to interest rate movements. The longer the maturity, the greater the bond's price volatility in response to interest rate movements. Bonds with low coupon rates exhibit greater price volatility than ones with high coupon rates.
Which of the following will increase the marketability risk of a bond?
Large block size transaction amount Marketability risk is the risk that a security will be difficult to sell. The easiest securities to trade are "round lots" of actively traded issues. For example, a round lot of stock is 100 shares; a round lot of bonds is 5 bonds. Large blocks are more difficult to market; and it is more difficult to sell thinly traded securities than actively traded securities.
Which rating applies to short term municipal issues?
MIG 1 MIG ratings stand for "Moody's Investment Grade," with MIG 1 being highest and SG ("Speculative Grade") being the lowest ratings. These are the ratings used for short term municipal notes. The "P" (Prime) ratings are used to grade corporate commercial paper.
For bonds trading at a discount, rank the yield measures from lowest to highest?
Nominal, Current, Basis basis = ytm current = income / current price nominal = income / par value
For bonds trading at a discount, rank the yield measures from lowest to highest?
Nominal; Current; Yield to Maturity; Yield to Call When bonds are trading at a discount, the stated (nominal) yield will be lowest. The current yield will be higher, since it is based on the discounted market price - not par value. The yield to maturity will be the next highest, since it includes the portion of the discount earned annually as part of the annual return in addition to the interest received. Finally, yield to call will be highest, since the discount would be earned over a shorter period of time, increasing the annual yield on the security.
Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is callable at par in 5 years, while the other is callable at par in 10 years. If interest rates drop by 200 basis points shortly after issuance, which statement is TRUE?
The bond callable in 10 years will appreciate more than the bond callable in 5 years If a bond is callable at par in the near future, any price rise due to falling interest rates will be suppressed since the issuer is likely to call in the debt and refund at lower interest rates. Thus, the bond callable in 10 years will appreciate more than the bond callable in 5 years if interest rates fall.
When bonds are trading at a discount, which statement is TRUE?
The deeper the discount, and the longer the maturity, the more volatile the bond's price movement in response to interest rate changes
In 2019, a customer buys 5 GE 10% debentures, M '29, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2020 at 103. If the bonds are called prior to maturity, which statement is TRUE?
The yield to call will be higher than the yield to maturity If the bonds are called prior to maturity, the yield to call will be higher than the yield to maturity since the discount will be earned faster and the bondholder will receive the call premium. You must know that yield to call will be higher than yield to maturity if the bond is trading at a discount and yield to call will be lower than yield to maturity if the bond is trading at a premium.
Which statement is TRUE regarding market risk for bondholders?
To avoid market risk, a customer would invest in bonds with short term maturities Market risk for a bondholder is the risk of rising interest rates forcing the price of a bond to drop. Market risk should not be confused with credit (default) risk. As interest rates rise, the price of a long term bond falls faster than that of a short term bond. To avoid market risk, a bondholder would want to invest in the shortest maturity possible.
Basis and bonds trading at premium
When bonds are trading at a premium, the stated yield or nominal yield will be the highest, since it is the annual income divided by par value. Current yield is lower because it is annual income divided by the current market price (which is at a premium to par). Basis (or yield to maturity) is even lower because it not only considers that the current market price is at a premium to par; it also pro-rates the loss of the premium over the life of the bond, reducing the annual yield below the current yield.
Which statement is TRUE regarding the effect of market interest rate movements on callable and puttable bond prices?
When interest rates fall, the call price tends to set a ceiling on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond
How are Treasury Notes quoted?
Whole and Fractional Treasury Notes and Bonds are quoted as a percentage of par value, with each "whole" point movement representing 1% of $1,000 par or $10. The minimum price increment is 1/32nd of 1%, so it is a fraction of par. Thus, Treasury Notes and Bonds are quoted in whole and fractional points. For example, a Treasury Note quoted at 100-8 is priced at 100 and 8/32nds % of $1,000 par = 100.25% = $1,002.50.
If a bond is purchased at a discount, which statement is TRUE?
Yield to call is higher than the yield to maturity When a bond is purchased at a discount and called prior to its redemption date, the yield to call received will be higher than if the bond is held to maturity since the discount will be earned faster. Yield to maturity will always be higher than current yield for a discount bond because YTM includes the earning of the discount as part of the overall return received from the bond while current yield ignores this component (it is simply Annual Income / Current Market Price).
When the price of a bond increases, which of the following statements regarding yields are TRUE?
Yield to maturity decreases and yield to call decreases When the price of a bond increases, yield to maturity drops. Similarly, because the bond is more expensive, yield to call will also fall.
Moody's ratings measure:
default risk of debt issues Moody's measures default risk of debt issues. Moody's only rates bonds, not equity securities.
A percentage of par quote is also known as a:
dollar quote
Exchange rate risk is a factor to consider when investing in foreign debt issues and the:
foreign currency depreciates in value
Exchange rate risk exists when making an investment in a:
foreign security when the U.S. dollar strengthens
The current yield of a bond will:
increase as bond prices fall just do simple math. 5/10= .5 5/8 = .6 The current yield is the stated rate of interest as a percentage of the bond's market value. As bond prices fall, the current yield increases; as bond prices rise, the current yield decreases. Current yield will only equal nominal yield when a bond is trading at par.
An increasing market rate of interest would lead to:
lower bond prices and higher bond yields A rising market rate of interest means that interest rates are increasing. If interest rates rise, then bond prices will drop, and yields on those bonds will rise.
Zero coupon bonds:
pay interest at maturity are bought at a discount and mature at par
A customer who has taken his portfolio and invested it only in money market instruments is most likely concerned with:
purchasing power risk If theres a high level of inflation (purchasing power risk), then interest rates start to rise. This causes bond prices to fall. It also causes stock prices to fall, because companies have to pay higher interest rates on bonds that they issue, depressing profits, and companies have a hard time raising prices as fast as their input costs rise, also depressing profits. Because interest rates rise when there is substantial inflation, money market rates go up as well. However, these securities do not lose value because their maturity is short, and when they mature, the proceeds are reinvested in other money market instruments offering high yields. These are one of the best investments during inflationary times.
An investor who expects interest rates to drop would invest in:
puttable debt issues
Bonds quoted on a yield to maturity basis are generally:
serial bonds
The yield to maturity for a discount bond is:
stated interest rate + annual capital gain / bond average value bond average value = (bond cost + redemption)/2
The yield to maturity for a premium bond is:
stated interest rate - annual capital loss / bond average value bond average value = (bond cost + redemption)/2
Municipal dollar bonds are generally:
term bonds
government bonds have
the - corporate doesn't
