Chapter 7: Bond Markets

A 10-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.

=Par value x (1 + inflation rate) x coupon rate / 2 $255

(Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent. a. 9.33 b. 7.84 c. 9.00 d. none of the above

N=15, PV=-$1,100, PMT= 9%*$1000=$90, FV=$1,000 Solve for I/Y= 7.84%

When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond. a. limit order b. market order c. stop order d. price order

a. limit order

If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ________ debt and ________ equity, which implies a ________ degree of financial leverage. a. more; less; higher b. less; more; higher c. more; less; lower d. None of these choices are correct.

a. more; less; higher

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. A b. Baa c. Aaa d. Aa e. None of these choices are correct.

b. Baa

All of the bonds issued by a particular company will have the same maturity, price, and credit rating. a. True b. False

b. False

During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods. a. True b. False

b. False

Subordinated indentures have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular indentures. a. True b. False

b. False

The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False

b. False

Corporate bonds usually pay interest on an annual basis. a. True b. False

b. False, semiannual basis

Which of the following statements is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed on the total amount of interest earned at maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity. d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. e. All of the above are true.

b. Investors are taxed on the total amount of interest earned at maturity.

Which of the following statements is not true regarding STRIPS? a. They are not issued by the Treasury. b. They have to be held until maturity. c. They are backed by the U.S. government. d. They are created and sold by various financial institutions. e. All of these choices are true regarding STRIPS.

b. They have to be held until maturity.

Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities. a. inverted bonds b. collateralized debt obligations (CDOs) c. reverse loans d. credit default swaps

b. collateralized debt obligations (CDOs)

Bonds that are not secured by specific property are called a. blanket mortgage bonds. b. debentures. c. open-end mortgage bonds. d. chattel mortgage bonds.

b. debentures

Which of the following statements is incorrect? a. The income earned from municipal bonds is exempt from federal taxes. b. The municipal bond must pay a risk premium to compensate for the possibility of default risk. c. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds. d. All of these choices are true

c. The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.

Which of the following is not an example of a municipal bond? a. general obligation bond b. revenue bond c. Treasury bond d. All of the above are examples of municipal bonds.

c. Treasury bond

A call provision on bonds normally allows the firm to a. sell new bonds at par value. b. sell bonds to the Treasury. c. buy back bonds that it previously issued. d. sell new bonds above market value.

c. buy back bonds that it previously issued

A protective covenant may a. specify all the rights and obligations of the issuing firm and the bondholders. b. require the firm to retire a certain amount of the bond issue each year. c. restrict the amount of additional debt the firm can issue. d. none of the above

c. restrict the amount of additional debt the firm can issue.

The ________ requires that an issuing firm retire a certain amount of a bond issue each year. a. trustee feature b. convertibility feature c. sinking-fund provision d. call feature

c. sinking-fund provision

Bonds issued by ____ are backed by the federal government. a. state governments b. AAA-rated corporations c. the Treasury d. city governments

c. the Treasury

The issuance of municipal securities is regulated by: a. the Consumer Financial Protection Bureau. b. the Securities and Exchange Commission. c. the respective state governments. d. the Federal Reserve.

c. the respective state governments.

Some bonds are "stripped," which means that a. they have defaulted. b. the call provision has been eliminated. c. they are transferred into principal-only and interest-only securities. d. their maturities have been reduced.

c. they are transferred into principal-only and interest-only securities

If interest rates suddenly ________, those existing bonds that have a call feature are ________ likely to be called. a. decline; more b. increase; less c.[decline; more] and [increase; less] d. increase; moree. decline; less

c.[decline; more] and [increase; less]

Which of the following is not an advantage of online bond brokerage services? a. Some brokers have narrowed their spreads so that they do not lose business to competitors. b. Some services charge commissions, which may be more easily understood than bid and ask spreads. c. Pricing is more transparent because investors can easily compare bid and ask spreads. d. All of these choices are advantages of online bond brokerage services.

d. All of these choices are advantages of online bond brokerage services.

Which of the following is not a reason for the increased volume in the foreign trading of U.S. securities? a. Primary dealers of U.S. Treasury notes and bonds have opened offices in various foreign cities. b. U.S. corporations are issuing more securities in foreign markets. c. Mutual funds containing U.S. securities are increasingly accessible to foreign investors. d. All of these choices are reasons for the increased volume in the foreign trading of U.S. securities.

d. All of these choices are reasons for the increased volume in the foreign trading of U.S. securities.

________ bonds are bonds issued by foreign governments. a. Yankee b. Chattel c. Mortgage d. Sovereign e. None of these choices are correct.

d. Sovereign

Which of the following is NOT likely to be an example of a protective covenant provision? a. a limit on the amount of dividends a firm can pay b. a limit on the amount of additional debt a firm can issue c. a limit on the corporate officers' salaries a firm can pay d. a call feature

d. a call feature

A ________ is secured by personal property; a ________ is a bond unsecured by specific property. a. chattel mortgage bond; first mortgage bond b. first mortgage bond; debenture c. first mortgage bond; chattel mortgage bond d. chattel mortgage bond; debenture e. None of these choices are correct.

d. chattel mortgage bond; debenture

A ____ has first claim on specified real property assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures. a. first mortgage bond; debenture b. chattel mortgage bond; subordinated debenture c. first mortgage bond; second mortgage bond d. first mortgage bond; subordinated debenture e. None of these choices are correct.

d. first mortgage bond; subordinated debenture

The ________ price is the price an investor is ________. a. ask; willing to pay for a bond b. ask; willing to sell a bond for c. bid; willing to pay for a bond d. bid; willing to sell a bond for e. [bid; willing to pay for a bond] and [ask; willing to sell a bond for]

e. [bid; willing to pay for a bond] and [ask; willing to sell a bond for]

Bonds are issued in the primary market through a telecommunications network. a. True b. False

a. True

Corporate bonds can be placed with investors through a public offering or a private placement. a. True b. False

a. True

When would a firm most likely call bonds? a. after interest rates have declined b. if interest rates do not change c. after interest rates increase d. just before the time at which interest rates are expected to decline

a. after interest rates have declined

Bonds that are secured by personal property are called a. chattel mortgage bonds. b. first mortgage bonds. c. second mortgage bonds. d. debentures.

a. chattel mortgage bonds

A variable-rate bond allows a. investors to benefit from rising market interest rates over time. b. investors to benefit from declining rates over time. c. issuers to benefit from rising market interest rates over time. d. None of these choices are correct.

a. investors to benefit from rising market interest rates over time.

Interest earned from Treasury bonds _______ subject to federal income tax and ________ subject to state and local taxes. a. is; is not b. is not; is c. is: is d. is not; is not

a. is; is not

Note maturities are usually ____, while bond maturities are ____. a. less than 10 years; 10 years or more b. 5 years or more; less than 5 years c. 10 years or more; less than 10 years d. less than 5 years; 5 years or more

a. less than 10 years; 10 years or more