Chapter 7 FIN TEST 2 MAF

The break-even tax rate between a taxable corporate bond yielding 7 percent and comparable nontaxable municipal bond yielding 5 percent can be expressed as: A. .05/ (1-t*) = 0.7 B. .05 - (1-t*) =.07 C. .07 + (1-t*) = .05 D. .05 x (1-t*) = .07 E. .05 x (1-t*) = .07

.05/ (1-t*) = .07

Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year; 6 percent coupon E. 7-year; 4 percent coupon

3-year; 6 percent coupon

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? A. 6-year coupon bonds B. 5-year TIPS C. 20-year coupon bonds 220 D. 5-year municipal bonds E. 7-year income bonds

5-year TIPS

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? A. 6-year, high-coupon, put bond B. 5-year TIPS C. 10-year AAA coupon D. 5-year floating bond E. 7-year income bond

7 - Year income bond

A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Call Price B. Current Price C. Face Value D. Clean price E. Dirty Price

Face Value

Real rates are defined as nominal rates that have been adjusted for which of the following? A. Inflation B. Default risk C. Accrued interest D. Interest rate risk E. Both inflation and interest rate risk

Inflation

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return/ A. Default B. Market movements C. Interest rate changes D. Inflation E. The time to maturity

Inflation

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk E. Taxability risk

Interest rate risk

The current yield is defined as the annual interest on a bond divided by which one of the following? A. Coupon Rate B. Face Value C. Market Price D. Call price E. Par Value

Market Price

Round Dot Inns is preparing a bond offing with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the flowing statements is correct? A. The bonds will become discount bonds if the market rate of interest declines B. The bonds will pay 10 interest payments of $60 each C. The bonds will sell at premium if the market rate is 5.5 percent D. The bonds will initially sell for $1,030 each E. The final payment will be in the amount of $1,060

The bonds will sell at a premium if the market rate is 5.5 percent

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Debenture B. Callable C. Floating-rate D. Junk E. Zero Coupon

Zero Coupon

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A. Current Yield B. Written record of all the current bond holders C. List of collateral used as bond security D. Current market price E. Price at which a bondholder can resell the bond to another bond holder

List of collateral used as bond security

A call-protected bond is a bond that: A. Is guaranteed to be called B. Can never be called C. Is currently being called D. Is callable at any time E. Cannot be called at this point in time

Cannot be called at this point in time

You are tying to compare the present values of two separate stream of cash flows that have equivalent risks. One stream is expressed in nominal values and the other steam is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows? A. 8 percent B. EAR of 8 percent compounded monthly C. Comparable risk-free rate D. Comparable real rate E. Nominal rate-risk-free rate

Comparable real rate

The interest rate risk premium is the: A. Addition compensation paid to investors to offset rising prices B. Compensation investors demand for accepting interest rate risk C. Difference between the yield to maturity and the current yield D. Difference between the mart interest rate and the coupon rate E. Difference between the coupon rate and the current yield

Compensation investors demand for accepting interest rate risk

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: A. Force the issuer to repurchase the bond prior to maturity B. Convert the bond into equity shares C. Defer all taxable income until the bond matures D. Convert the bond into a 5 percent perpetuity E. Have the principal amount adjusted for inflation

Convert the bond into equity shares

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? A. Coupon B. Face Value C. Discount D. Call premium E. Yield

Coupon

Which one of the following applies to a premium bond? A. Yield to maturity > current yield > coupon rate B. Coupon rate = current yield = yield to maturity C. Coupon rate > yield to maturity > current yield D. Coupon rate < yield to maturity < current yield E. Coupon rate > Current yield > yield to maturity

Coupon rate > Current yield > yield to maturity

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1030, plus any accrued interest. The additional $30 is called the: A. Dirty price B. Redemption Value C. Call premium D. Original issue discount E. Redemption discount

Call premium

A bond that can be paid off early at the issue's discretion is referred to as being which type of bond? A. Par value B. Callable C. Senior D. Subordinated E. Unsecured

Callable

Which one of the following relationships applies to par value bond? A. Yield to maturity > current yield > coupon rate B. Coupon rate > yield-to-maturity > current yield C. Coupon rate = current yield = yield to maturity D. Coupon rate < yield to maturity < current yield E. Coupon rate > current yield > yield to maturity

Coupon rate = current yield = yield to maturity

Municipal bonds: A. Are totally risk free B. Generally have higher coupon rates than corporate bonds C. Pay interest that is federally tax free D. Are rarely callable E. Are free of default risk

Pay interest that is federally tax free

The taxability risk premium compensates bondholders for which one of the following? A.Yield decreases in response to market changes B. Lack of coupon payments C. Possibility of default D. A bond's unfavorable tax status E. Decrease in a municipality's credit rating

A bond's unfavorable tax status

A note is generally defined as: A. A secured bond with an initial maturity of 10 years or more B. A secured bond that initially matures in less than 10 years C. Any bond secured by a blanket mortgage D. An unsecured bond with an initial maturity of 10 years or less E. Any bond maturing in 10 years or more

An unsecured bond with an initial maturity of 10 years or less

Bonds issued by the U.S government: A. Are considered to be free of interest rate risk B. Generally have higher coupons than comparable bonds issued by a corporation C. Are considered to be free of default risk D. Pay interest that is exempt from federal income taxes E. Are called "munis"

Are considered to be free of default risk

Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues B. Only apply to privately issued bonds C. Are a feature found only in government-issued bond indentures D. Only apply to bonds that have a deferred call provision E. Are primarily designed to protect bondholders

Are primarily designed to protect bondholders

A bond that is payable to whomever has physical possession of the bond is said to be in: A. New issue condition B. Registered form C. Bearer form D. Debenture status E. Collateral status

Bearer form

Which one of these statements is correct? A. Most long-term bond issues are referred to as unfunded debt B. Bonds provide tax benefits to issuers C. The risk of a firm financially failing decreases when a firm issues bonds D. All bonds are treated equally in a bankruptcy proceeding E. A debenture is a senior secured debt

Bonds provide tax benefits to issuers

The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time of maturity increases D. Time ot maturity and coupon rate both decrease E. Coupon rate and time to maturity both increase

Coupon rate decreases and the time to maturity increases

The collar of a floating-rate bond refers to the minimum and maximum: A. Call period B. Maturity Dates C. Market Prices D. Coupon Rates E. Yields to maturity

Coupon rates

Jason's Pains just issued 20- year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following? A. Note B. Discounted C. Zero-Coupon D. Callable E. Debenture

Debenture

Which one of the following is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount B. The call price must equal the par value C. An increase in market rates increase the market price of a bond D. Decreasing the time to maturity increases the price of a discount bond all else constant E. Increasing the coupon rate decreases the current yield, all else constant

Decreasing the time to maturity increases the price of a discount bond, all else constant

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default Risk B. Taxability C. Inflation D. Liquidity E. Interest rate risk

Default Risk

A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments B. Early bond redemption C. Converting bonds into equity securities D. Paying preferred dividends E. Reducing bond coupon rates

Early bond redemption

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Coupon B. Face Value C. Discount D. Yield E. Dirty price

Face Value

Treasure bonds are: A. Issued by any governmental agency in the U.S. B. Issued only on the first day of each fiscal year by the U.S Department of Treasury C. Bonds that offer the best tax benefits of any bonds currently available D. Generally issued as semiannual coupon bounds E. Totally risk free

Generally issued as semiannual coup bonds

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent B. Greater than 3.5 percent but less than 7 percent C. 7 percent D. Greater than 7 percent E. Less than 3.5 percent

Greater than 7 percent

A zero coupon bond: A. Is sold at a large premium B. Pays interest that is tax deductible to the issuer at the time of payment C. Can only be issued by the U.S Treasury D. Has more interest rate risk than a comparable coupon bond E. Provides no taxable income to the bondholder until the bond matures

Has more interest rate risk than a comparable coupon bond

Callable bonds generally A. Grant the bondholder the option to call the bond anytime after the deferment period B. Are callable at par as soon as the call-protection period ends C. Are called when market interest rates increase D. Are called within the first three years after issuance E. Have a sinking fund provision

Have a sinking fund provision

Road Hazards has 12- Year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. At Par B. In registered form C. In street form D. As debentures E. As callable bond

In registered form

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: A. Increases at an increasing rate B. Increases at a decreasing rate C. Increases at a constant rate E. Decreases at a decreasing rate

Increases at a decreasing rate

Cat bonds are primarily designed to help: A. Municipalities survive economic recessions B. Corporations respond to overseas competition C. The federal government cope with huge deficits D. Corporations recover form involuntary reorganizations E. Insurance companies fund excessive claims

Insurance companies fund excessive claims

A "fallen angel" is a bond that has moved from: A. Being publicly traded to being privately traded B. Being a long-term obligation to being a short-term obligation C. Being a premium bond to being a discount bond D. Senior status for liquidation purposes E. Investment grade to speculative grade

Investment grade to speculative grade

Hot foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to present value of all future interest and principal payments discounted at a rate equal to the comparable Treasure rate plus .50 percent. Which one of the following correctly describes this bond? A. The bond rating is B B. Market value is less than face value C. The coupon rate is 3 percent D. It has a "mark whole" call price E. Variable Interest payments are variable

It has a "make whole" call price

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A. Default risk B. Taxability C. Liquidity D. Inflation E. Interest rate risk

Liquidity

Which bond would you generally expect to have the highest yield? A. Risk-free Treasury bond B. Nontaxable, highly liquid bond C. Long-term, high-quality, tax-free bond D. Short-term, inflation-adjusted bond E. Long-term, taxable junk bond

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? A. Short-term; low coupon B. Short-term; high coupon C. Long-term; zero coupon D. Long-term; low coupon E. Long-term; high coupon

Long-term; zero coupon

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? A. Decreased in value due to the change in inflation rates B. Experienced an increase in its bond rating C. Maintained a fixed real rate of return D. Increased in value in response to the change in market rates E. Increased in value due to a decrease in time to maturity

Maintained a fixed real rate of return

DLQ inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases then the: A. Coupon rate will also increase B. Current yield will decrease C. Yield to maturity will be less than the coupon rate D. Market price of the bond will decrease E. Coupon payment will increase

Market price of the bond will decrease

A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. Market rates B. Comparable corporate bond rates C. The risk-free rate D. Inflation E. Maturity

Maturity

The bond principal is repaid on which one of these dates? A. Coupon Date B. Yield Date C. Maturity Date D. Dirty Date E. Clean Date

Maturity Date

Interest rates that include an inflation premium are referred to as: A. Annual percentage rates B. Stripped C. Effective annual rates D. Real rates E. Nominal Rates

Nominal rates

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A. Semiannual coupon B. Discount bond C. Note D. Trust deed E. Collateralized

Note

A deferred call provision is which one of the following? A. Requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond B. Ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt C. Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date E. Requirement that a bond issuer pay a call premium that is equal to or greater than one year's coupon should that issuer decide to call a bond

Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred as the: A. Trustee relationships B. Bylaws C. Legal bounds D. Trust deed E. Protective covenants

Protective covenants

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? A. Risk-free rate B. Realized rate C. Nominal rate D. Real rate E. Current rate

Real Rate

The Fisher effect is defined as the relationship between which of the flowing variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates E. Real rates, interest risk premium, and nominal rates

Real rates, inflation rates, and nominal rates

Which one of the following statements concerning bond ratings is correct? A. Investment grade bonds are rated BB or higher by Standard amp; Poor's B. Bond ratings assess both interest rate risk and default risk C. Split-rated bonds are called crossover bonds D. The highest rating issued by Moody's is AAA E. A "fallen angel" is a term applied to all "junk" bonds

Split-rated bonds are called crossover bonds

The yield on a corporate bond differ from those on a comparable Treasury security primarily because of: A. Interest rate risk and taxes B. Taxes and default risk C. Default and interest rate risks D. Liquidity and inflation rate risks E. Default, inflation, and interest rate risks

Taxes and default risk

The pure time value of money is known as the: A. Liquidity effect B. Fisher effect C. Term structure of interest rates D. Inflation factor E. Intrest rate factor

Term structure of interest rates

Which one of these is a negative covenant that might be found in a bond indenture? A. The company shall maintain a current ratio of 1.1 or higher B. The company cannot lease any major assets without bondholder approval C. The company must maintain the loan collateral in good working order D. The company shall provide audited financial statements in a timely manner E The company shall maintain a cash surplus of $100,000 at all times

The company cannot lease any major assets without bondholder approval

A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium B. The current yield exceeds the coupon rate C. The bond is selling at par value D. The current yield exceeds the yield-to-maturity E. The coupon rate has increased to 7 percent

The current yield exceeds the coupon rate

Which one of the following statements is correct? A. The risk-free represents the change in purchasing power B. Any return greater than the inflation rate represents the risk premium C. Historical real rates of return sit be positive D. Nominal rates exceed real rates by the amount of the risk-free rate E. The real rate must be less than the nominal rate given a positive rate of inflation

The real rate must be less than the nominal rate given a positive rate of inflation

Which one of the following statements is false concerning the term structure of interest rates? A. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates B. The term structure of interest rates includes both an inflation premium and an interest rate risk premium C. The term structure of interest rates and the time of maturity are always directly related D. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates E. The interest rate risk premium increases as the time to maturity increases

The term structure of interest rates and the time to maturity are always directly related

A premium bond that pays $60 in interest annually mattes in seven year. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued B. The bond is worth less today then when it was issued C. The yield-to-maturity is less than the coupon rate D. The coupon rate is greater than the current yield E. The yield-to-maturity equals the current yield

The yield-to-maturity is less than the coupon rate

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? A. Put provision B. Positive covenant C. Warrant D. Crossover rating E. Call provision

Warrant

The bond market requires a return of 9.8 % on the five-year bond issued by JW industries. The 9.8% is referred to as which one of the following? A. Coupon Rate B. Face Rate C. Call Rate D. Yield to Maturity E. Current Yield

Yield to Maturity

A bond has a market price that exceeds its face value. Which of these features currently applies to this bond? A. Discount bond B. Yield to maturity equal to the current yield C. Currently selling at par D. Current yield greater than coupon rate E. Yield to maturity less than the coupon rate

Yield to maturity less than the coupon rate

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield-to-maturity is greater than 6 percent B. The current yield is 6 percent C. The next interest payment will be $30 D. The bond is currently valued at one-half of its issue price E. You will realize a capital gain on the bond if you sell it today

You will realize a capital gain on the bond if you sell it today

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than

a discount; less than