Fin 333 Test 3

A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year. a. True b. False

T

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

T

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

T

Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time. a. True b. False

T

Many bonds are listed on the New York Stock Exchange (NYSE). a. True b. False

T

Rule 144A creates liquidity for securities that are privately placed. a. True b. False

T

Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only. a. True b. False

T

Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions. a. True b. False

T

The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers. a. True b. False

T

The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies. a. True b. False

T

The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk. a. True b. False

T

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering. a. True b. False

T

When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies. a. True b. False

T

Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value. a. True b. False

T

A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? a. 12.12 percent b. 11.11 percent c. 13.00 percent d. 14.08 percent e. 15.25 percent

A

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent. a. 3.10 b. 0.77 c. 1.00 d. none of the above

A

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

A

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

A

Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields. a. higher; lower b. lower; lower c. higher; higher d. none of the above

A

Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa

A

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent. a. 14.39 b. 14.13 c. 14.59 d. 14.33 e. none of the above

A

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called. a. decline; more b. decline; less c. increase; more d. none of the above

A

LIBOR is: a. the interest rate charged on international interbank loans. b. the average rate charged on commercial loans in Europe. c. the rate charged by the Federal Reserve for loans to banks. d. the rate charged by the European Central Bank for loans to banks.

A

Large corporations typically make ____ bids for T-bills so they can purchase larger amounts. a. competitive b. noncompetitive c. very small d. none of the above

A

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

A

The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar. a. increased b. reduced c. always negative d. unaffected

A

The federal funds market allows depository institutions to borrow a. short-term funds from each other. b. short-term funds from the Treasury. c. long-term funds from each other. d. long-term funds from the Federal Reserve. e. B and D

A

The rate at which depository institutions effectively lend or borrow funds from each other is the ____. a. federal funds rate b. discount rate c. prime rate d. repo rate

A

The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

A

The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. greater than; recessionary b. greater than; boom economy c. less than; boom economy d. less than; recessionary

A

When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d. 6.02 e. none of the above

A

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

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

Which of the following eurozone countries has not recently experienced debt repayment problems? a. Finland b. Greece c. Portugal d. Spain

A

Which of the following instruments has a highly active secondary market? a. banker's acceptances b. commercial paper c. federal funds d. repurchase agreements

A

Which of the following is true of money market instruments? a. Their yields are highly correlated over time. b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper). c. Treasury bills have the highest yield. d. They all make periodic coupon (interest) payments. e. A and B

A

You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d. 6.02 e. none of the above

A

____ are sold at an auction at a discount from par value. a. Treasury bills b. Repurchase agreements c. Banker's acceptances d. Commercial paper

A

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. a. Competitive b. Noncompetitive c. Negotiable d. Non-negotiable

A

____ bonds have the most active secondary market. a. Treasury b. Zero-coupon corporate c. Junk d. Municipal

A

____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments. a. Bearer b. Registered c. Treasury d. Corporate

A

(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

B

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

B

A credit rating agency is paid by: a. the purchasers of the bonds that the agency rates. b. the issuers of the bonds that the agency rates. c. the taxpayers, because the rating agencies are government agencies. d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.

B

A ten-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 $____. a. 250 b. 255 c. 500 d. 510

B

An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation? a. about 10.1 percent b. about 12.6 percent c. about 11.4 percent d. about 13.5 percent e. about 14.3 percent

B

An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is a. 2.0 percent. b. 5.10 percent. c. 5.00 percent. d. 2.04 percent.

B

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result. a. rise b. decline c. be zero d. be unaffected

B

At a given point in time, the actual price paid for a three-month Treasury bill is a. usually equal to the par value. b. more than the price paid for a six-month Treasury bill. c. equal to the price paid for a six-month Treasury bill. d. none of the above

B

At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity. a. slightly less than b. slightly higher than c. equal to d. A and B both occur with about equal frequency

B

Commercial paper has a maximum maturity of ____ days. a. 45 b. 270 c. 360 d. none of the above

B

Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9 c. 10.5 d. more information is needed to answer this question

B

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; lower b. more; less; higher c. less; more; higher d. none of the above

B

If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield? a. about 13.4 percent b. about 12.5 percent c. about 11.3 percent d. about 11.6 percent e. about 10.7 percent

B

Ignoring transaction costs, the cost of borrowing with commercial paper is equal to: a. the yield on T-bills of the same maturity. b. the yield earned by investors holding the paper until maturity. c. the federal funds rate. d. the par value of the paper.

B

Investors in Treasury notes and bonds receive ____ interest payments from the Treasury. a. annual b. semiannual c. quarterly d. monthly

B

Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12.00 b. 9.00 c. 10.50 d. More information is needed to answer this question.

B

Municipal general obligation bonds are ____. Municipal revenue bonds are ____. a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax b. supported by the municipal government's ability to tax; supported by revenue generated from the project c. always subject to federal taxes; always exempt from state and local taxes d. typically zero-coupon bonds; typically zero-coupon bonds

B

Securities with maturities of one year or less are classified as a. capital market instruments. b. money market instruments. c. preferred stock. d. none of the above

B

T-bills and commercial paper are sold a. with a stated coupon rate. b. at a discount from par value. c. at a premium about par value. d. A and C e. none of the above

B

The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies. a. Federal Ratings Bureau b. Office of Credit Ratings c. Office of Agency Supervision d. Ratings Oversight Commission

B

The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar. a. increased b. reduced c. always negative d. unaffected

B

The minimum denomination of commercial paper is a. $25,000. b. $100,000. c. $150,000. d. $200,000.

B

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically: a. equal to the rate paid by that country's government. b. slightly higher than the rate paid by that country's government. c. mostly influenced by the demand for and supply of long-term funds in that country. d. set by the country's central bank.

B

The rate on Eurodollar floating rate CDs is based on a. a weighted average of European prime rates. b. the London Interbank Offer Rate. c. the U.S. prime rate. d. a weighted average of European discount rates.

B

Treasury bills a. have a maturity of up to five years. b. have an active secondary market. c. are commonly sold at par value. d. commonly offer coupon payments.

B

When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index. a. auction-rate securities b. structured notes c. leveraged notes d. stripped securities

B

Which of the following is not true regarding the call provision? a. It typically requires a firm to pay a price above par value when it calls its bonds. b. The difference between the market value of the bond and the par value is called the call premium. c. A principal use of the call provision is to lower future interest payments. d. A principal use of the call provision is to retire bonds as required by a sinking-fund provision. e. A call provision is normally viewed as a disadvantage to bondholders.

B

Which of the following statements is incorrect with respect to the federal funds rate? a. It is the rate charged by financial institutions on loans they extend to each other. b. It is not influenced by the supply and demand for funds in the federal funds market. c. The federal funds rate is closely monitored by all types of firms. d. Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates. e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.

B

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

B

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

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

B

____ are not primary purchasers of bonds. a. Insurance companies b. Finance companies c. Mutual funds d. Pension funds

B

A ____ has first claim on specified 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; second mortgage bond b. first mortgage bond; debenture c. first mortgage bond; subordinated debenture d. chattel mortgage bond; subordinated debenture e. none of the above

C

A ____ is not a money market security. a. Treasury bill b. negotiable certificate of deposit c. bond d. banker's acceptance e. All of the above are money market securities.

C

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

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield? a. 9.43 percent b. 9.28 percent c. 9.14 percent d. 9.00 percent

C

A variable rate bond allows a. investors to benefit from declining rates over time. b. issuers to benefit from rising market interest rates over time. c. investors to benefit from rising market interest rates over time. d. none of the above.

C

Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in a. dollars. b. euros and making payments from U.S. headquarters. c. euros and making payments from its German subsidiary. d. dollars and making payments from its German subsidiary.

C

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. none of the above

C

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

C

Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent. a. 7.08 b. 6.95 c. 6.99 d. 7.04 e. none of the above

C

Commercial paper is a. always directly placed with investors. b. always placed with the help of commercial paper dealers. c. placed either directly or with the help of commercial paper dealers. d. always placed by bank holding companies.

C

Commercial paper is subject to: a. interest rate risk. b. default risk. c. A and B. d. none of the above.

C

Credit guarantees for commercial paper: a. ensures that the issuer of commercial paper will use the funds obtained to provide credit. b. are issued by the Federal Reserve Bank of New York. c. are only as good as the credit of the guarantor. d. A and C

C

For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer. a. floating value b. variable proceeds c. best efforts d. firm commitment

C

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____. a. remain unchanged b. fall c. rise d. none of the above

C

Interest earned from Treasury bonds is a. exempt from all income tax. b. exempt from federal income tax. c. exempt from state and local taxes. d. subject to all income taxes.

C

Leveraged buyouts are commonly financed by the issuance of: a. money market securities. b. Treasury bonds. c. corporate bonds. d. municipal bonds.

C

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins? a. 25.00 percent b. 35.41 percent c. 14.59 percent d. none of the above

C

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

The LIBOR scandal in 2012 involved: a. banks reporting inflated earnings from their loans. b. hackers breaking into the loan documentation files. c. banks falsely reporting the interest rates they offered in the interbank market. d. collusion among the banks when setting the commercial paper.

C

The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit. a. 50 b. 70 c. 10 d. 5

C

The coupon rate of most variable-rate bonds is tied to a. the prime rate. b. the discount rate. c. LIBOR. d. the federal funds rate.

C

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

C

The price O bidders will pay at a Treasury bill auction is the a. highest price entered by a competitive bidder. b. highest price entered by a noncompetitive bidder. c. weighted average price paid by all competitive bidders whose bids were accepted. d. equally weighted average price paid by all competitive bidders whose bids were accepted. e. none of the above

C

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be a. eliminated. b. reduced. c. increased. d. unchanged (there is no effect).

C

Treasury bills are sold through ____ when initially issued. a. insurance companies b. commercial paper dealers c. auction d. finance companies

C

Treasury bond dealers a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers. b. profit from a very wide spread between bid and ask prices in the Treasury securities market. c. may trade Treasury bonds among themselves. d. make a primary market for Treasury bonds.

C

When a bank guarantees a future payment to a firm, the financial instrument used is called a. a repurchase agreement. b. a negotiable CD. c. a banker's acceptance. d. commercial paper.

C

Which money market transaction is most likely to represent a loan from one commercial bank to another? a. banker's acceptance b. negotiable CD c. federal funds d. commercial paper

C

Which of the following institutions is most likely to purchase a private bond placement? a. commercial bank b. mutual fund c. insurance company d. savings institution

C

Which of the following is not a money market security? a. Treasury bill b. negotiable certificate of deposit c. common stock d. federal funds

C

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

Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds? a. NCDs b. retail CDs c. commercial paper d. federal funds

C

Which of the following securities is most likely to be used in a repo transaction? a. commercial paper b. certificate of deposit c. Treasury bill d. common stock e. All of the above are equally likely to be used in a repo transaction.

C

____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable. a. A banker's acceptance b. A repurchase agreement c. Commercial paper d. A Treasury bill

C

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. none of the above

D

(Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. none of the above

D

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

D

A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount? a. 10.26 percent b. 0.26 percent c. $2,500 d. 10.00 percent e. 11.00 percent

D

An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities. a. upward; upward b. downward; downward c. upward; downward d. downward; upward

D

An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield? a. 8.62 percent b. 8.78 percent c. 8.90 percent d. 9.14 percent e. 9.00 percent

D

An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

D

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. none of the above

D

Eurodollar deposits a. are U.S. dollars deposited in the U.S. by European investors. b. are subject to interest rate ceilings. c. have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States). d. are not subject to reserve requirements.

D

For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price. a. specific value b. fixed proceeds c. best efforts d. firm commitment

D

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities. a. weak; downward b. weak; upward c. strong; upward d. none of the above

D

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a. 13.43 percent b. 2.78 percent c. 10.55 percent d. 2.80 percent e. none of the above

D

Online bond brokerage services offer several advantages including: a. pricing is more transparent because investors can easily compare bid and ask spreads. b. some services charge commissions, which may be more easily understood than bid and ask spreads. c. some brokers have narrowed their spreads so that they do not lose business to competitors. d. all of the above

D

When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected. a. higher; higher b. lower; lower c. A and B d. none of the above

D

Which of the following is not mentioned in your text as a protective covenant? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. the appointment of a trustee in all bond indentures e. All of the above are mentioned in the text as protective covenants.

D

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

D

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

D

____ are the most active participants in the federal funds market. a. Savings and loan associations b. Securities firms c. Credit unions d. Commercial banks

D

When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated. a. higher; higher b. lower; lower c. higher; lower d. lower; higher e. Answers C and D are correct.

E

Which of the following is not a money market instrument? a. banker's acceptance b. commercial paper c. negotiable CDs d. repurchase agreements e. all of the above are money market instruments

E

Which of the following is not true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until 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. d. Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts. e. all of the above are true

E

A private bond placement has to be registered with the SEC. a. True b. False

F

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

F

Bond dealers do not have an inventory of bonds. a. True b. False

F

Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds. a. True b. False

F

Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity. a. True b. False

F

Corporate bonds are more standardized than stocks. a. True b. False

F

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

F

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

F

High-risk bonds are called trash bonds. a. True b. False

F

If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called. a. True b. False

F

Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason. a. True b. False

F

Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC. a. True b. False

F

Savings bonds are bonds issued by the Federal Reserve. a. True b. False

F

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

F

The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. a. True b. False

F

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

F

Treasury bond auctions are normally conducted only at the beginning of each year. a. True b. False

F

Treasury bonds are issued by state and local governments. a. True b. False

F

Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury. a. True b. False

F