Debt KM
DEF Corporate debenture is quoted at 103 and pays a $10 semiannual coupon. What is the current yield of this bond? A) 0.9% B) 1.9% C) 9.7% D) 19.4%
1.9%
An investor owns a 9% coupon bond with par value of $1,000. The bond can be called after 5 years for a call premium of 104.5. Assuming the bond is called away at the earliest possible date, how much money will the investor receive upon redemption? A) 1135 B) 1045 C) 1000 D) 1090
1090 When a bond is called away, an investor receives the call premium (104.5 percent of par, or $1,045) plus the final semi-annual coupon payment: 9% x $1,000 par / 2 = $45. Therefore, $1,045 call premium + $45 interest = $1,090
On February 1st a customer purchases a municipal bond for settlement on February 3rd. The bond pays semi-annual interest on January 15 and July 15. How many days of accrued interest are added to the buyer's price? A) 33 days B) 20 days C) 19 days D) 18 days
18 days
The price of which of the following bonds will be most adversely affected by a sharp increase in interest rates? A) 10-year bond B) 5-year bond C) Money market instrument D) 30-year bond
30 yr bc longer is more sensitive
A 4% municipal bond is trading in the secondary market for 96. Which two of the following statements about the bond's current yield are true? I. The bond's current yield is 4% II. The bond's current yield is 4.17% III. The bond's CY is less than its YTM IV. The bond's CY is greater than its YTM A) I and IV B) I and III C) II and III D) II and IV
4.17% (4% / 960) Discount = current yield is greater than the coupon rate, current yield less than YTM
On Friday September 1st a customer purchases a municipal bond for regular way settlement. The bond pays semi-annual interest on December 1 and June 1. How many days of accrued interest are added to the buyer's price? A) 94 days B) 95 days C) 96 days D) 93 days
94 days Regular way settlement for municipal bonds is T+2 business days, and the accrued interest calculation is based on 30-day months. There are 30 days in June, 30 days in July, 30 days in August, and 4 in September due to the weekend (settlement date is Tuesday September 5th). The buyer's price includes interest that goes up to, but does not include the settlement date.
A bond can be traded in the market at a competitive bid-ask price. With this feature, the bond is considered to be A) high-quality. B) callable. C) marketable. D) investment-grade.
A bond is considered "marketable" if it can be traded in the market at competitive bid-ask prices.
The accrued interest that is calculated for settlement of a Treasury bond A) Is based on actual-day months. B) Is subtracted from the purchase price. C) Starts on the dated date. D) Includes interest paid on the settlement date.
A) Is based on actual-day months. For government bonds, interest starts accruing on the interest payment date before settlement. Interest payable on the settlement date is not included. Dated date applies only to new issues of municipal bonds. Government bond interest is based on actual-day months. Accrued interest is added to the price paid by the purchaser and received by the seller.
A corporate bond valued at "300 over" comparable treasury securities is A) yielding 300 basis points more than treasury securities B) trading at a premium C) less risky than treasury securities D) selling at $300 over the price of treasury securities
A) yielding 300 basis points more than treasury securities The expression "300 over" refers to the yield of a bond being 300 basis points greater than that of a comparable security.
For a bond that Moody's rates Aa1, what is the corresponding S&P rating? A) Baa B) AA+ C) AAA D) Baa
AA+ Moody's ratings use upper and lower case letters (Aa), while S&P uses all caps. Remember that "The poor wear caps." Moody's uses a 1 to indicate higher quality within a given rating. S&P uses a +.
In regard to a bond's tax cost basis, what is the main difference between accretion and amortization? A) Accretion applies to bonds bought at a discount; amortization to bonds bought at a premium. B) Accretion applies to long-term bonds; amortization to short-term bonds. C) Accretion applies to government bonds; amortization to corporate and municipal bonds. D) They are synonymous terms; there is no difference.
Accretion is the upward adjustment towards par of the cost basis of a bond purchased at a discount. Amortization is the downward adjustment towards par of the cost basis of a bond purchased at a premium.
What is accrued interest
Accrued interest is the interest that has accumulated on a bond since the last interest payment. Interest accrues up to, but not including, the settlement date.
Which of the following factors affect a debt obligation's coupon? I. Ratings II. Maturity III. Covenants IV. Security A) I and II only B) I, II, and III only C) I, II, III, and IV D) I only
All Coupon refers to the annual interest rate ("pricing") paid on a debt obligation's principal amount outstanding. It can be based on either a floating rate (typical for bank debt) or a fixed rate (typical for bonds). Bank debt generally pays interest on a quarterly basis, while bonds generally pay interest on a semiannual basis. There are a number of factors that affect a debt obligation's coupon, including the type of debt (and its investor class), ratings, security, seniority, maturity, covenants, and prevailing market conditions.
How often is the interest income on zero-coupon bonds taxed? A) At maturity B) The interest income is not taxable C) Annually D) Every six months
Annually Although the interest (the difference between the discounted purchase price and par value) is not actually paid until maturity, investors must still pay tax each year on the annual accretion.
At maturity, an investor who holds a 6% bond issued by ABC Corporation will receive A) 106 B) 103 C) 1030 D) 1060
At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030.
The Town of X bond carries a YTM of 2.50% and a yield to call of 2.75%. This bond is currently trading A) 25 basis points above $1,000 B) Below par value C) At par value D) Above par value
B) Below par value
An investor purchased a City of Seattle 4% municipal bond that matures 3-25-2019, at 98 3/8. From this information you can tell that the bond A) Is trading at par value B) Has a yield to maturity that is greater than its nominal yield. C) Will yield less than 4% if it is called. D) Is priced at $980.38
B) Has a yield to maturity that is greater than its nominal yield. Municipal bonds are priced in points, and 1 point is equal to $10. The price of this bond is $980 plus $3.75 (3/8 x $10) or $983.75. The bond is trading at a discount, so if it was called, its YTC would be greater than 4%. Bonds trading at a discount have YTM that is greater than their coupon, or nominal, yield.
Which of the bonds listed below would have the greatest price volatility? A) A variable rate bond B) A long-term zero coupon bond C) A Treasury note D) A short-term investment grade bond
Because zero coupon bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market. Variable bonds have little price fluctuation because their rates adjust to current interest rates. Also, long term bonds are generally more volatile than short term bonds.
Bonds on default trade
Bonds in default trade flat, meaning they do not trade with accrued interest.
How to calcluate current yield
Current yield = annual coupons / current price.
A bond has annual coupons totaling $60. What is the highest price that can be paid for the bond to generate at least a 5% current yield?
Current yield is calculated as the annual coupons divided by current price. One way to solve this problem is to divide $60 by 5% = $1,200 current price. Alternatively, a 5% current yield means an investor can afford to pay up to 20 times total annual coupons = $60 X 20 = $1,200.
If a bond declines in price, will coupon yield or current yield be affected?
Currrent yield bc coupon doesn't change!
All of the following are covered under T+2 settlement dates EXCEPT A) Common stock B) Municipal securities C) Corporate bonds D) Government securities
D) Government securities (T+1)
A bond's par value is lower than its market price. This bond A) Is trading at a discount. B) Has a yield to maturity that is greater than its current yield. C) Has a current yield that is more than its coupon rate of interest. D) Has a nominal yield that is greater than its yield to maturity.
D) Has a nominal yield that is greater than its yield to maturity.
A customer purchased a 5% U.S. government bond yielding 6%. A year before the bond matures, new U.S. government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably I. bought it at a discount II. bought it at a premium III. sold it at a discount IV. sold it at a premium A) II and IV B) II and III C) I and II D) I and IV
D) I and IV When the customer purchased the bond the YTM was greater than the nominal yield. This means that the bond was purchased at a discount as the investor will realize a capital gain upon maturity. Interest rates and bond prices move in opposite directions, so when interest rates decrease to 4% the price of the 5% bond will increase as it has a higher coupon and is more attractive to investors. The customer will then be able to sell the bond at a premium.
Two bonds have relatively equal credit quality and terms to maturity. Which of the following statements is true? A) The bond with the lower coupon is more liquid. B) The bonds will have equal coupon rates. C) The bond with the higher coupon will trade at a lower price. D) The bond with the higher coupon is more marketable.
D) The bond with the higher coupon is more marketable.
T or F Bonds with a lower par generally pay a higher coupon
False
Which of the following is NOT a primary responsibility of a broker-dealer's transfer agent? A) Issues and cancels certificates on behalf of the issuer B) Validates mutilated certificates and assists in tracking lost or missing securities C) Acts as intermediary for the issuer D) Guarantees the signature of the parties involved in the transfer
Guarantees the signature of the parties involved in the transfer
The calculation of accrued interest for government bonds A) Is subtracted from the price owed to the seller B) Includes the last interest payment date C) Is based on 360 day years D) Is not included on the confirmation
Includes the last ineterest payment date The accrued interest calculation for a government bond is based on actual day years and months. It is added to the price the seller receives at settlement and included in the total price. The calculation includes interest on the prior coupon date up to, but not including, the settlement date.
Duration measures
It is a measure of how much a bond's price will change when interest rates fluctuate.
An investor has purchased 5 ABC 3% Corporate convertible debentures with a maturity date of 20XX. This investor can expect to receive a total of $150 of interest from these bonds A) Every six months B) Every 30 days C) When the bonds mature D) Once per year
Once per year
In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date?
T+1 for interest (Settlement is T+2)
Which of the following statements is true about a callable bond that is trading at a premium? A) The bond's CY is lower than its YTM. B) Because the bond is callable the coupon rate of the bond is probably lower than comparable non-callable bonds. C) The bond is most likely to be called to save interest expense. D) The bondholder will receive less than par value if the bond is called.Â
The bond is most likely to be called to save interest expense.
Term, or dollar bonds, mature at a specified date in the future, commonly known as the maturity date. Term bonds can also be repaid prior to maturity if A) The CEO of the company authorizes early retirement of the debt. B) If the company charter has a provision for early repayment of the bonds. C) The company's stockholders approve the action. D) The bonds are called by the issuer.
The bonds are called by the issuer.
When a municipal bond is sold, the amount of accrued interest A) Is added to the price paid to the seller B) Is calculated based on actual day months C) Is only included in the price if the bond is trading flat D) Includes the settlement date when calculated
The calculation of accrued interest for municipal bonds is based on 360 day years and 30 day months. It is added to the price paid to the seller, and includes interest payable up to the settlement date only. Bonds that trade flat do not include accrued interest.
A refunding occurs when A) The issuer of the bond repays the principal prior to its maturity date. B) The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates. C) An investor sells his bond prior to its maturity date. D) Interest rates have increased since the issuer's last bond offering was made.
The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates.
When a bond is trading at a discount to par, which of the following will be TRUE? A) Its nominal yield, current yield, and yield-to-maturity will all be equal B) The current yield will be lower than the nominal yield, and the yield-to-maturity will be lower than the current yield C) The yield-to-maturity will be higher than the nominal yield, but lower than the current yield D) The nominal yield will be lower than the current yield and yield-to-maturity
The nominal yield will be lower than the current yield and yield-to-maturity
An investor purchased 10 State of Nevada bonds at 104 5/8. The total price of the bonds is A) 10406.3 B) 1046.25 C) 10462.5 D) 1040.63
The price of one bond is $1,040. + 6.25, or $1,046.25. The price of 10 bonds is $10,462.50.
ABC Law Firm has just changed the rating of the Friendly School District bonds from BBB+ to AA-. As the result, A) School districts in general would be viewed as generally unattractive investments B) The price of these bonds would increase while their yields would fall C) The yield on these bonds would rise while their price would fall D) The issuer will likely be facing an increase in insurance payments
The price of these bonds would increase while their yields would fall
An investor buys an 8.0% coupon bond to yield 7.0%. What will most likely happen to the price of the bond as maturity approaches? A) The price will fall to zero. B) The price will remain constant. C) The price will increase towards par. D) The price will decrease towards par.
The price will decrease towards par. This bond has a coupon of 8.0% and a yield-to-maturity of 7.0%, indicating that the bond is trading at a premium. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a premium (e.g. 105% of par), the price would need to decrease to arrive at par value.
What is the main difference between yield to maturity (YTM) and yield to call (YTC)? A) Premiums and discounts are ignored in YTC but not in YTM. B) Premiums and discounts are ignored in YTM but not in YTC. C) The current market price is relevant when calculating YTM but not YTC. D) The time at which the bond terminates are different.
The time at which the bond terminates are different. Yield to maturity reflects the yield earned if the investor holds the bond until maturity, while yield to call reflects the yield earned assuming the issuer calls the bond back prior to maturity.
A municipal bond issue is structured whereby a portion of the issue is retired each year. This is an example of a
This is an example of a serial bond structure. In this scenario, outstanding bonds are retired at different intervals with a portion of the issue maturing each year.
A bond is selling at a price of 81 with all coupons since July of 2011 attached. This bond is said to be A) Trading with recall B) Trading flat with unpaid coupons attached C) Trading and interest D) Trading short
Trading flat When coupons from previous interest payments are attached, the interest has not been paid. Such bonds are termed "trading flat".
A customer purchased a Treasury bond in a regular way transaction on Monday, April 4th. The bond is a J&J bond. How many days of accrued interest will the seller receive? A) 94 B) 96 C) 80 D) 79
Treasury bonds accrue interest on an actual days basis and use a 365 day year. They settle T+1, in this case on Tuesday, April 5th. Interest accrues from the last interest payment date (January 1st), up to, but not including the settlement date: January - 31 days February - 28 days March - 31 days April - 4 days 94 days
A 20-year municipal bond, callable in 5 years, is trading at 101 ¼. Which two of the following statements are true? I. The bond's YTC is higher than its YTM. II. The bond's YTC is lower than its YTM. III. The bond's CY is greater than its nominal yield. IV. The bond's CY is lower than its nominal yield. A) I and IV B) I and III C) II and IV D) II and III
When a bond is trading at a premium, YTC is lower than YTM, and its current yield is lower than nominal yield.
In a book-entry format, ownership of the security is recorded by A) Clearing house B) The issuer C) Central depository D) Corporate counsel
When a book-entry format is used, ownership is recorded by a central depository, rather than by the issuer. This has become the most common method of tracking ownership
The inputs for calculating yield to call (YTC) include the bond's current market price, par value, and what else? A) First call date and any call premium B) Maturity date and call premium C) Maturity date D) First call date
YTC is calculated the same as yield to maturity (YTM) with two exceptions. First, the first call date is used instead of maturity date. Second, any call premium on the first call date must be added to par value.
An issuer is most likely to call a bond which has A) a high coupon and no call premium when interest rates are falling B) a low coupon and no call premium when interest rates are rising C) a low coupon and a call premium when interest rates are rising D) a high coupon and a call premium when interest rates are falling
a high coupon and no call premium when interest rates are falling
A municipal bond that is quoted with a yield to call that is higher than its coupon rate is recognized as trading A) At a premium B) At a discount C) At par D) flat
at a discount
An investor who has purchased a new municipal bond issue notices a "dated date" of June 15. This is the date that A) all future interest payments will be made on the bond. B) the bond will first become available for investors to purchase. C) represents the first semi-annual intertest payment date for the bond, the other being December 15. D) interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond.
interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond. The "dated date" is the date when interest begins to accrue on a new municipal bond issue. This date is used in determining the amount of the first interest payment only. Subsequent interest payments will be based on the semi-annual interest (coupon) payment dates for the bond. The dated date will no longer be relevant at this point.
Which of the following factors is most impactful on the price of a bond?
interest rate
If a bond trades "flat," the buyer
is not responsible for paying interest that has accrued since the last interest payment.
A corporation will call in some of its outstanding bonds. When the bonds are called, the issuer A) will offer the investor another bond with a lower interest rate. B) must make one final interest payment to the bondholder. C) will pay the investor par value plus accrued interest to that date. D) will pay the investor the current market value of the bond plus accrued interest to that date.
issuer will pay the bondholder the par value of the bond plus any accrued interest to that date
Accrued interest is calculated from the A) dated date and continues to the settlement date B) last coupon date and continues to the day prior to the settlement date C) last coupon date and continues through the settlement date D) dated date to the next coupon date
last coupon date and continues to the day prior to the settlement date
interest rate risk = _________ risk
market risk
An investor purchases a T-Bond in the open market, paying 3% interest. The next day, the fed increases the discount rate. In this scenario, the investor would be immediately concerned with A) inflationary risk B) credit risk C) reinvestment rate risk D) market risk
market risk When interest rates increase, the immediate impact will be a decline in bond prices. Interest rate risk is also referred to as market risk. It is possible that higher rates could also lead to higher inflation, but that would be a longer term concern.
The credit rating of a bond A) may be changed only with the approval of the issuer. B) may change occasionally while it is outstanding C) can only be changed in the event the issuer files for bankruptcy. D) is established at the time of issuance and will not change during the lifetime of the bond.
may change occasionally while it is outstanding
Are federal bonds callable?
no
Retiring an outstanding bond issue at maturity by using money from the sale of a new offering is known as
refunding
Zero coupon bonds do not have _________ risk
reinvestment rate risk.
The yield to call is calculated using the_________call date.
the first call date
Secondary market transactions in Treasury securities and option contracts settle
the following business day (T+1)
All of the following statements regarding variable rate bonds are true EXCEPT A) the amount of interest paid varies over the life of the loan B) an index or other common base rate such as LIBOR is usually used to determine the rate payable for each period C) they typically have greater price volatility than fixed rate bonds D) the lender assumes interest rate risk
they typically have greater price volatility than fixed rate bonds
LIBOR is sometimes used as the benchmark to set
to set a new coupon rate on a bond.
Which of the following products would carry the greatest amount of inflation risk? A) TIPS B) Treasury bond C) Treasury bill D) Convertible bond
treasury bond
When a bond is bought at a premium to par value and held to maturity, the maximum number of years that it must be amortized, for tax cost basis purposes, is A) 15 years. B) until maturity. C) 10 years. D) 5 years.
until maturity
An investor buys a bond for $1,100. By May 1st, it has declined in value to $950. Assuming semi-annual interest payments of $24, what is the bonds nominal yield?
4.8% Nominal yield is the coupon rate, which is the annual interest paid divided by par value. Note that because the bond pays semi-annual interest of $24, the annual interest is $48, which is then divided by par value of $1,000.
Which of the following call dates would be LEAST beneficial for an investor? A) 10 years B) 15 years C) 20 years D) 5 years
5 years Investors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk.
A corporate bond is trading "with" interest. This means that A) accrued interest is included in its price. B) the seller of the bond makes an additional interest payment to the buyer of the bond. C) accrued interest is deducted from the price of the bond. D) there is heightened demand for the bond.
A bond is said to be trading "with" interest or "and" interest when accrued interest is included in its price.
A zero coupon municipal security is most appropriate for which of the following investors? A) A working adult who would like funds available to pay off her mortgage in 10 years so that she can retire B) A parent who is planning a college education fund for a child and wants access to funds that will not be taxed if used for qualified education expenses C) A retired individual who would like a regular income stream to supplement pension income D) A middle aged investor in a high tax bracket who is looking to generate as much tax-free income as possible
A working adult who would like funds available to pay off her mortgage in 10 years so that she can retire Zero coupon bonds are purchased at a discount and mature to face value. They are most suitable for investors that would like to plan for a lump sum to be available at a defined date in the future.
Which of the following are sub-investment grade credit ratings? I. BB+ II. BBB- III. B1 IV. Baa3 A) I and IV B) I and III C) II and IV D) II and III
B) I and III I. BB+ II. BBB- III. B1 IV. Baa3
When the market price of a bond is lower than its par value, A) Its current yield is lower than its nominal yield. B) Its YTM is higher than its current yield C) Its nominal yield and its YTM are the same D) Its nominal yield is higher than its YTM.
B) Its YTM is higher than its current yield
When compared to a bond with a low credit rating, a bond that carries a high credit rating is A) Subject to a higher risk of issuer default B) More likely to receive interest and principal payments C) Less liquid D) Likely to pay a higher interest rate
B) More likely to receive interest and principal payments A credit rating measure the issuer's ability to pay interest and principal (default risk). More risk means the potential for more reward, so bonds with lower credit ratings will generally pay a higher rate of interest. A bond with a high credit rating would be more liquid.
Which of the following is a characteristic of a corporate zero-coupon bond? A) They typically pay interest semi-annually B) Prices generally fluctuate more than other types of bonds in the secondary market C) Imputed interest is not taxable at the federal level D) They generally have short-term maturities
B) Prices generally fluctuate more than other types of bonds in the secondary market Zero-coupon bonds are generally long-term bonds that are purchased at a deep discount and mature to their face value. Because of the deep discount, their prices generally fluctuate more than prices of other bonds that are traded in the secondary market. They pay interest only at maturity, although imputed interest must be reported for tax purposes each year.
A bond has a call feature under which it can be called on May 1 of the years 2024, 2026 and 2028. It matures on May 1 of 2030. The yield to call (YTC) calculation assumes A) the bond is called at the midpoint of the three call dates. B) the bond is called on 5/1/24. C) the bond is called on 5/1/28. D) the bond is called on 5/1/26.
B) the bond is called on 5/1/24. Some bonds have more than one call date. Always assume the first call date in the calculation of YTC.
Who is the owner of a bearer bond? A) The registered principal B) The bearer of the bond certificate C) The purchaser D) The underwriter
Bearer bonds, which were issued in the U.S. for many decades, functioned much like cash in that the bearer of the bond certificate was considered the rightful owner. Unlike other investment securities, the ownership and transactions involving ownership of bearer bonds are not formally recorded. In 1982, Congress passed legislation that eliminated new bearer bonds. Now, there is only one form of note issued in the U.S. in bearer form Â- a Federal Reserve Note Â- i.e., the cash or currency in your wallet
Advantages of book entry form of ownership for U.S. government securities include all of the following EXCEPT A) Reduced printing costs for the U.S. government B) Increased protection for investors from loss and theft of securities C) Ease of transfer between parties when securities are bought and sold D) Faster regular way settlement terms than apply to government securities issued in other forms
Faster regular way settlement terms than apply to government securities issued in other forms
When a customer purchases a new municipal bond, the interest included in the accrued interest calculation I. begins on the trade date II. begins on the dated date III. includes the settlement date IV. does not include the settlement date A) I and III B) II and IV C) I and IV D) II and III
For newly issued municipal bonds, the accrued interest calculation begins on the dated date, and includes interest up to, but not including the settlement date.
An investor purchased a 5 1/2% bond to yield 6 1/2%. If the company calls the bond at par before maturity, the investor's return would be A) greater than 6 1/2% B) 6.50% C) less than 5 1/2% D) 5.50%
For this bond, NY = 5.5% and YTM = 6.5%. With YTM>NY, this indicates that the bond is sold at a discount, and for a discount bond, YTC > YTM.
All of the following statements are true regarding callable bonds EXCEPT A) Corporate bonds are often callable, but government bonds typically are not B) Issuers choose to call bonds when current interest rates are higher than the coupon rate of the bond C) Corporate callable bonds usually have a higher coupon rate than non-callable bonds D) Issuers no longer pay interest on bonds that have been called
Issuers choose to call bonds when current interest rates are higher than the coupon rate of the bond
The accrued interest that is added to the price the seller receives at settlement of a municipal bond that was purchased in a secondary market transaction A) Is calculated based on actual day months. B) Does not include interest paid on the settlement date. C) Starts on the day following the prior interest payment date. D) Starts on the dated date.
It does not include interest payable on the settlement date. Accrued interest for municipal bonds is calculated based on 30-day months, and starts on the date of the prior interest payment. The dated date is only relevant for the calculation of accrued interest on newly issued municipal bonds.
Which of the following statements is correct regarding accrued interest? A) It is taxed as ordinary income and increases the cost basis of a bond. B) It is taxed as a capital gain and does not impact the cost basis of a bond. C) It is compensation to the buyer for the next scheduled interest payment. D) It is taxed as ordinary income and does not impact the cost basis of a bond.
It is taxed as ordinary income and does not impact the cost basis of a bond.
When comparing long-term bonds and short-term bonds, all of the following statements are true EXCEPT A) When interest rates change, fluctuations in the dollar price of long-term bonds are usually greater than short-term bonds B) Long term bonds have more purchasing power risk than short-term bonds C) Long-term bonds generally provide greater liquidity than short-term bonds D) Long-term bonds generally have higher yields than short term bonds
Long-term bonds generally provide greater liquidity than short-term bonds
An investor holds a bond containing a put feature. This provision A) Can only be exercised if interest rates declined B) Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to maturity. C) Requires the investor to sell his bond back to the company prior to the maturity date of the bond. D) Enables either the issuer or the investor to redeem the bond prior to maturity.
Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to maturity.
The accrued interest that is calculated for settlement of a newly issued municipal bond A) Starts on the dated date. B) Is based on actual-day months. C) Includes interest paid on the settlement date. D) Is subtracted from the price that will be paid by the purchaser.
Starts on the dated date For newly issued municipal bonds, the issuer designates a date that interest starts accruing. This date is the dated date. Municipal bond interest is based on 30 day months. The calculation does not include the settlement date, and is added to the purchase price.
In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date? A) T + 3 B) T + 2 C) T D) T + 1
T+1 For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest includes the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond.
Government securities and options require ___________ settlement
T+1 settlement - settlement on the next business day following the trade.
An investor purchasing 2 GMAC ZR 12's at 53 1/2 would receive annual interest of A) $53.50 B) $0 C) $12 D) $120
The ZR in the quote indicates that this bond is a zero, it does not make semi-annual interest payments. Zero's sell at a deep discount and mature at par. The difference between the purchase price and the cash received at maturity is interest income.
An investor would most likely buy a floating rate security issued by the U.S. Treasury for which of the following reasons? A) To receive interest that is tax exempt at the federal level. B) To protect against interest rate volatility C) To benefit from interest rate arbitrage D) To hedge a portfolio from systemic risk
To protect against interest rate volatility Floating rate securities feature an interest rate that varies or "floats" based on the performance of an underlying benchmark rate. Investors purchase them to protect against volatile interest rates, as these securities can help reduce the risk of locking in a low rate for a long period of time.
What does yield to maturity (YTM) measure in a bond, assuming the bond is held to its scheduled maturity? A) Yield B) Total return C) Yield discounted by time value D) The value of interest payments
Total Return YTM measures the total return of a bond, held from the current date through scheduled maturity. It includes both scheduled interest payments and any capital gain or loss - i.e., the difference, if any, between the current price and maturity value. The denominator in YTM is the current bond price. So, YTM changes as current bond prices change.
For a bond trading at a discount, how does yield to call (YTC) compare to yield to maturity (YTM)?
YTC is greater For a bond trading at a discount, yield to call is higher than yield to maturity, as the investor receives the discount back at an accelerated rate (at the first call date rather than waiting until the maturity date).
A trader quotes a corporate bond as "trading on a 6.7% basis". Which yield is the trader referring to? A) Yield to call (YTC) B) Yield to maturity (YTM) C) Nominal yield (NY) D) Current yield (CY)
YTM Yield to maturity is the most widely quoted yield for bonds. If a quote indicates a bond is "trading at X%" or "trading on a X% basis," or "yielding X%," assume yield to maturity is being referenced.
A bond with ten years to maturity is bought at a price of $860. The annual adjustment to its cost basis will be A) amortization of $70. B) accretion of $70. C) amortization of $14. D) accretion of $14.
accretion of $14. Bonds purchased at a discount are accreted, meaning adjusted upwards towards par value each year. The accretion is calculated on a straight-line basis, by dividing the discount off par ($140) by the number of years to maturity (10). Assume a bond's par value is $1,000.
nonrefundable bonds do not allow
an issuer to reissue bonds if interest rates decrease
The buyer of a bond will pay the seller of a bond ________ accrued interest
any accrued interest at the time of the transaction. The buyer will then collect and retain the entire next interest payment as the seller of the bond has already received any interest owed prior to the sale.
If a municipal issue is quoted as "Orange County, LA, General Obligation bonds: 6.25% of 2035 at 6.45%, the bonds are selling A) at a premium B) at a discount C) flat D) at par
at discount 6.25% = nominal yield 6.45% = yield-to-maturity YTM is greater than the NY, the bond is trading at a discount
A corporate bond that has a sinking fund provision A) is usually retired in whole at the discretion of the trustee B) has more default risk than other corporate bond issues without this provision C) can be offered at a lower interest rate than other bonds D) is exempt from the Trust Indenture Act of 1939
can be offered at a lower interest rate than other bonds Bonds that are retired through a sinking fund have less default risk, because the issuer is making payments in advance to a trustee to buy bonds in the open market. This reduction of principal risk allows the issuer to offer these bonds at a lower interest rate.
An investor purchases a 5% bond for 90. Rank the yields for this bond from lowest to highest I. Current Yield II. Coupon III. Yield to call IV. Yield to maturity A) II, I, III, IV B) II, I, IV, III C) I, II, IV, III D) I, II, III, IV
nominal yield (i.e. coupon), current yield, the yield to maturity, and the yield to call. You may want to note that the yield-to-worst is always the lower of the yield to maturity or yield to call.
An investor purchases a 6% bond for 115. Rank the yield computations for this bond from highest to lowest. I. Current yield II. Nominal yield III.Yield to call IV. Yield to maturity A) II, IV, I, III B) II, I, IV, III C) II, IV, III, I D) II, I, III, IV
nominal yield (i.e. coupon), current yield, yield to maturity, and yield to call.
