FIN 300 Exam 3 PQ's (Ch 7)

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Increases at a decreasing rate

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest Rate Risk

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?

List of collateral used as bond security.

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?

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?

Maintained a fixed real rate of return

The current yield is defined as the annual interest on a bond divided by which one of the following?

Market Price

The bond principal is repaid on which of these dates?

Maturity Date

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

Maturity.

Which one of these is a negative covenant that might be found in a bond indenture?

The Company Cannot lease any major assets without bondholder approval

A sinking fund is managed by a trustee for which one of the following purposes?

Early Bond Redemption

Which one of the following bonds is the least sensitive to interest rate risk?

3 year; 6 percent coupon

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?

Face Value

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:

Greater than 7 percent

A zero coupon bond:

Has more interest rate risk than a comparable coupon bond

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05 / (1-t) = .07

Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate?

6.40%

The taxability risk premium compensates bondholders for which one of the following?

A bond's unfavorable tax status

A bond is quoted at a price of $1,011. This price is referred to as the:

Clean Price

Interest Rate risk premium

Compensation investors demand for accepting interest rate risk.

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

The collar of a floating-rate bond refers to the minimum and maximum:

Coupon Rates

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

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?

Default Risk

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Dirty Price

Municipal Bonds

Pay interest that is federally tax free

A deferred call provision is which one of the following?

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 to as the:

Protective Covenants

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Spread

Round Dot Inns is preparing a bond offering 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 following statements is correct?

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

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Two Month's Interest

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following?

Yield to Maturity