finance 333 chapter 6-2

true

"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.

true

1. TIPS are a Treasury offering that protects investors from unexpected increases in inflation.

true

10. An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture.

5.632% [(100/75.75)(1/(5x2)) - 1] x 2 = 5.632%

16. You buy a principal STRIP maturing in five years. The price quote per hundred of par for the STRIP is 75.75 percent. Using semiannual compounding, what is the promised yield to maturity on the STRIP? A. 5.632 percent B. 5.712 percent C. 2.816 percent D. 2.945 percent E. 4.566 percent

974.69

17. A T-bond with a $1,000 par is quoted at 97:14 bid, 97:15 ask. The clean price for you to buy this bond is A. $974.38. B. $975.42. C. $974.69. D. $975.77. E. none of the options.

7.18% $984.688 = $35 × PVIFA (r%, 28) + $1,000 × PVIF (r%, 28)

18. The quoted ask yield on a 14-year $1,000 par T-bond with a 7 percent semiannual payment coupon and a price quote of 98:15 is A. 7.00 percent. B. 7.18 percent. C. 7.30 percent. D. 3.59 percent. E. 3.63 percent. $984.688 = $35 × PVIFA (r%, 28) + $1,000 × PVIF (r%, 28)

strip

19. A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a A. STRIP. B. T-note. C. T-bond. D. G.O. bond. E. Revenue bond.

37

20. An 18-year T-bond can be stripped into how many separate securities? A. 18 B. 19 C. 36 D. 37 E. 38

$342,742 (5,000/1.0316) * (550,000/5,000)

21. A life insurer owes $550,000 in eight years. To fund this outflow, the insurer wishes to buy STRIPS that mature in eight years. The STRIPS have a $5,000 face value per STRIP and pay a 6 percent APR with semiannual compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)? A. $110,000 B. $342,742 C. $355,224 D. $362,355 E. $370,890 (5,000/1.0316) * (550,000/5,000)

103:9 $60 x PVIFA (0.05488/2, 16) + $1,000 x PVIF (0.05488/2,16) = $1,032.79488; To convert to fraction quote do the following: Round down ($1,032.79488/10) + Round {($1,032.79488/10) - Round down ($1,032.79488/10)] x 32} = 103 9/32

22. The ask yield on a 6 percent coupon Treasury bond maturing in eight years is 5.488 percent. If the face value is $1,000, what should be the QUOTED cost of the bond today (use semiannual compounding)? A. 103:6 B. 103:7 C. 103:8 D. 103:9 E. 103:10

AA-rated callable corporate bond without a sinking fund

23. Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus? A. AAA-rated non-callable corporate bond with a sinking fund B. AA-rated callable corporate bond with a sinking fund C. AAA-rated callable corporate bond with a sinking fund D. High-quality municipal bond E. AA-rated callable corporate bond without a sinking fund

132.61 ((8%/2) x 10,000) x (61 days since last coupon/184) = $132.61

24. On July 1, 2012, you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent and the price quote is 98:6. The last coupon payment was May 1, 2012, and the next payment is November 1, 2012 (184 days total). The accrued interest is A. $132.61. B. $101.00. C. $50.54. D. $40.65. E. $35.67.

$9313.75 300 x PVIFA (3.5%, 24) + 10,000 x PVIF (3.5%, 24) = 9,197.08; 300*(70/180) = 116.67; 9,197.08 + 116.67 = 9,313.75

25. On September 1, 2012, an investor purchases a $10,000 par T-bond that matures in 12 years. The coupon rate is 6 percent and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7 percent. The dirty price of the bond is A. $9,295.45. B. $9,300.55. C. $9,313.75. D. $9,321.82. E. $9,333.24.

-18.75 9,234.38 - 9,253.13 = -18.75

40. A T-bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)? A. $12.50 B. -$12.50 C. -$18.75 D. $18.75 E. $0.00 9,234.38 - 9,253.13 = -18.75

taxable at federal level only; exempt from federal taxes

26. Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________. A. exempt from federal taxes; exempt from all taxes B. taxable at the state level only; exempt from state taxes only C. taxable at federal level only; exempt from federal taxes D. taxable at the state level; taxed at the federal level E. totally tax exempt; exempt from state taxes

10.17% 0.06/[1 - (0.28 + 0.09 + 0.04)]

27. An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local income taxes. For this investor a municipal bond paying 6 percent interest is equivalent to a corporate bond paying _____ interest. A. 11.79 percent B. 10.17 percent C. 9.08 percent D. 9.68 percent E. 8.47 percent

30% 1 - (0.0575/0.0825)

28. An investor is trying to decide between a muni paying 5.75 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? A. 80.00 percent B. 20.00 percent C. 25.00 percent D. 66.67 percent E. 30.00 percent

collateralized by the earnings from a specific project.

29. Standard revenue bonds are A. backed by the full taxing authority of the municipality. B. collateralized by the earnings from a specific project. C. bonds backed by mortgages. D. backed by the U.S. Treasury. E. always offered with a best efforts offering.

firm commitment

30. When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is known as a A. rights offering. B. private placement. C. firm commitment. D. best efforts. E. standby offering.

revenue bonds

31. The largest type of municipal bonds outstanding is _______________. A. revenue bonds B. industrial development bonds C. Treasury STRIPS D. convertible bonds E. general obligation bonds

Will normally be called after interest rates drop and Have higher required returns than non-callable bonds

32. Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher required returns than non-callable bonds A. I and II only B. II and IV only C. II and III only D. I, II, and III only E. I, II, III, and IV are true

allows privately placed investments to be traded on a limited basis

33. SEC Rule 144 A does which of the following? A. allows privately placed investments to be traded on a limited basis B. allows bond issuers to call their bonds when desired C. determines the limits of responsibility of bond covenants D. requires that bonds traded on the NYSE bond market utilize the ABS system E. none of the options

bonds that may be converted to a certain number of shares of stock determined by the conversion ratio

34. Convertible bonds are I. options attached to bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio. A. I only B. I and II only C. I, II, and III D. IV only E. I and III only

22.22% [(1,100/25)/36] - 1

35. A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25 shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price have to rise to make conversion potentially attractive? A. 10.00 percent B. 14.73 percent C. 22.22 percent D. 23.64 percent E. 25.69 percent

Issuers of privately placed bonds tend to be less well known than public bond issues. Interest rates on privately placed debt tend to be higher than for similar public issues. Purchasers of privately placed debt have assets of at least $100 million.

36. With respect to private placements of bonds, which of the following is correct? I. Issuers of privately placed bonds tend to be less well known than public bond issues. II. Interest rates on privately placed debt tend to be higher than for similar public issues. III. Purchasers of privately placed debt have assets of at least $100 million. IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity. A. I only B. I and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

The issuer chooses the currency of denomination. Eurobonds typically have denomination of $5,000 and $10,000. Eurobonds are bearer bonds.

37. Which of the following statements about Eurobonds is/are true? I. The issuer chooses the currency of denomination. II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds. III. Eurobonds typically have denomination of $5,000 and $10,000. IV. Eurobonds are bearer bonds. A. I and II only B. I, III, and IV only C. II, III, and IV only D. II and III only E. I, II, III, and IV are true

with coupons attached that are redeemable by whoever has the bond.

38. Bearer bonds are bonds A. with coupons attached that are redeemable by whoever has the bond. B. where the registered owner automatically receives bond payments when scheduled. C. in which the issue matures on a series of dates. D. issued in another currency other than the bond issuer's home currency. E. issued in a different country other than the bond issuer's home country.

$1,052.19

39. A T-bond with a $1,000 par is quoted at a bid of 105:7 and an ask of 105:9. If you sell the bond, you will receive A. $1,052.81. B. $1,052.19. C. $1,057.22. D. $1,059.22. E. none of the options.

5.79% $1,065.00 = $31.25 × PVIFA (r%, 60) + $1,000 × PVIF (r%, 60 yrs.); trial and error or financial calculator for r

41. The quoted ask yield on a 30-year $1,000 par T-bond with a 6.25 percent coupon and a price quote of 106:16 is ___________ (use semiannual compounding). A. 2.94 percent B. 2.90 percent C. 5.79 percent D. 5.87 percent E. 4.95 percent $1,065.00 = $31.25 × PVIFA (r%, 60) + $1,000 × PVIF (r%, 60 yrs.); trial and error or financial calculator for r

$11,843.37 ($10,000 * 1.0256) * (1 + (0.0425/2))

42. An investor buys a $10,000 par, 4.25 percent annual coupon TIPS security with three years to maturity. If inflation every six months over the investor's holding period is 2.50 percent, what is the final payment the TIPS investor will receive? A. $10,213.00 B. $10,869.28 C. $11,822.25 D. $11,843.37 E. $12,201.11 ($10,000 * 1.0256) * (1 + (0.0425/2))

5.89% 1 - [0.99 * 0.98 * 0.97] = 5.89%

43. A bond investor has a 99 percent chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond, but only a 98 percent chance in the second year, and a 97 percent chance in the third year and beyond. What is the cumulative default probability over the first three years she holds the bond? A. 3.75 percent B. 4.24 percent C. 5.89 percent D. 6.85 percent E. 7.33 percent

$6.50 (975/150) = 6.50

44. You purchase a $1,000 face value convertible bond for $975. The bond can be converted into 150 shares of stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert? A. $4.50 B. $5.26 C. $6.50 D. $7.10 E. $7.25

5.89% [(1,043.29 x 1.055)/1,000]1/5 - 1

45. You purchased a five-year annual payment 6 percent coupon bond for $1,000 and you planned on holding it to maturity. However, right after you bought the bond, it was called at $1,043.29 when all interest rates fell to 5 percent and remained there for the full five years. You reinvested the money for the full five years. What was your annual compound rate of return off your original investment? A. 6.00 percent B. 5.89 percent C. 5.75 percent D. 5.23 percent E. 5.00 percent

false

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principal is paid by final maturity.

true

Accrued interest owed to the bond seller increases as the next coupon payment date approaches.

true

Bond ratings use a classification system to give investors an idea of the amount of default rate risk associated with the bond issue.

true

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

false

Callable bonds have lower required yields than similar convertible bonds, ceteris paribus.

true

Eurobonds are bonds denominated in the issuer's home currency, but are issued outside their home country.

true

In a Treasury bond quote with a $1,000 face value, you find the bid is equal to 100:24 and the ask is equal to 100:26. You could buy this bond for $1,008.125.

false

Revenue bonds are backed by the full revenue of the municipality.

true

T-notes and T-bonds are issued in minimum denominations of $100, or multiples of $100.

false

The dirty price plus accrued interest is called the clean price of the security.

false

Treasury notes and bonds and municipal bonds are default risk free.

false

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.