Finance Chapter 7 Practice Questions

Interest rates that include an inflation premium are referred to as: Select one: a. annual percentage rates b. nominal rates c. effective annual rates d. real rates e. stripped rates

B

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? Select one: a. discount b. coupon c. call premium d. face value e. yield

B

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the : Select one: a. spread price b. dirty price c. call price d. quoted price e. clean price

B

Real rates are defined as nominal rates that have been adjusted for which of the following? Select one: a. accrued interest b. inflation c. both inflation and interest rate risk d. interest rate risk e. default risk

B

The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? Select one: a. discounted b. debenture c. note d. callable e. zero-coupon

B

The specified date on which the principal amount of a bond is payable is referred to as which one of the following? Select one: a. coupon date b. maturity c. yield date d. clean date e. dirty date

B

The specified date on which the principal amount of a bond is payable is referred to as which one of the following? Select one: a. dirty date b. maturity c. clean date d. coupon date e. yield date

B

Which one of t he following is the price a dealer will pay to purchase a bond? Select one: a. call price b. bid price c. bid-ask spread d. par value e. asked price

B

A bond that has only one payment, which occurs at maturity, defines which one of the following? Select one: a. debenture b. zero coupon c. junk d. callable e. floating-rate

B

A bond's coupon rate is equal to the annual interest divided by which one of the following? Select one: a. dirty price b. face value c. clean price d. call price e. current price

B

A call-protected bond is a bond that: Select one: a. can never be called b. cannot be called during a certain period of time c. is guaranteed to be called d. is callable at any time e. is currently being called

B

A call-protected bond is a bond that: Select one: a. is callable at any time b. cannot be called during a certain period of time c. is currently being called d. can never be called e. is guaranteed to be called

B

A Treasury yield curve plots Treasury interest rates relative to which one of the following? Select one: a. maturity b. comparable corporate bond rates c. inflation d. the risk-free rate e. market rates

A

A bond is quoted at a price of $989. This price is referred to as which one of the following? Select one: a. clean price b. dirty price c. face price d. call price e. wholesale price

A

A bond that is payable to whomever has physical possession of the bond is said to be in: Select one: a. bearer form b. collateral status c. new-issue condition d. debenture status e. registered form

A

A bond that is payable to whomever has physical possession of the bond is said to be in: Select one: a. bearer form b. new-issue condition c. collateral status d. debenture status e. registered form

A

A bond's coupon rate is equal to the annual interest divided by which one of the following? Select one: a. face value b. clean price c. dirty price d. current price e. call price

A

A sinking fund is managed by a trustee for which of the following purposes? Select one: a. early bond redemption b. converting bonds into equity securities c. paying interest payments d. reducing coupon rates e. paying preferred dividends

A

An indenture is: Select one: a. the legal agreement between the bond issuer and the bondholders b. the written record of all the holders of a bond issue c. a bond that is secured by the inventory held by the bond's issuer d. a bond that is past its maturity date but has yet to be repaid e. another name for a bond's coupon

A

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? Select one: a. face value b. dirty price c. coupon d. yield e. discount

A

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? Select one: a. coupon b. face value c. discount d. call premium e. yield

A

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the: Select one: a. protective conenants b. trustee relationships c. legal bounds d. "plain vanilla" conditions e. bylaws

A

The taxability risk premium compensates bond holders for which one of the following? Select one: a. a bond's unfavorable tax status b. decrease in a municipality's credit rating c. yield decreases in response to market changes d. possibility of default e. lack of coupon payments

A

Which one of the following relationships is stated correctly? Select one: a. Decreasing the time to maturity increases the price of a discount bond, all else constant. b. Increasing the coupon rate decreases the current yield, all else constant. c. The coupon rate exceeds the current yield when a bond sells at a discount. d. An increase in market rates increases the market price of a a bond. e. The call price must equal the par value.

A

Which one of the following relationships is stated correctly? Select one: a. The call price must equal the par value. b. Decreasing the time to maturity increases the price of a discount bond, all else constant. c. An increase in market rates increases the market price of a a bond. d. The coupon rate exceeds the current yield when a bond sells at a discount. e. Increasing the coupon rate decreases the current yield, all else constant.

B

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? Select one: a. interest rate risk b. default risk c. inflation d. liquidity e. taxability

B

You want to buy a bond from a dealer. Which one of the following prices will you pay? Select one: a. bid-ask spread b. asked price c. call price d. bid price e. auction price

B

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? Select one: a. collateralized b. unsecured c. callable d. senior e. zero coupon

C

A Treasury yield curve plots Treasury interest rates relative to which one of the following? Select one: a. inflation b. the risk-free rate c. maturity d. comparable corporate bond rates e. market rates

C

A deferred call provision is which one of the following? Select one: 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 which prevents bond issuers from redeeming callable bonds prior to a specified date d. requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond e. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity

C

A sinking fund is managed by a trustee for which of the following purposes? Select one: a. reducing coupon rates b. converting bonds into equity securities c. early bond redemption d. paying preferred dividends e. paying interest payments

C

An indenture is: Select one: a. a bond that is past its maturity date but has yet to be repaid b. the written record of all the holders of a bond issue c. the legal agreement between the bond issuer and the bondholders d. a bond that is secured by the inventory held by the bond's issuer e. another name for a bond's coupon

C

Atlas Entertainment has a 15-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. Select one: a. in street form b. at par c. in registered form d. as callable e. as debentures

C

Interest rates that include an inflation premium are referred to as: Select one: a. real rates b. stripped rates c. nominal rates d. annual percentage rates e. effective annual rates

C

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the : Select one: a. quoted price b. spread price c. dirty price d. call price e. clean price

C

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: Select one: a. premium b. equilibrium c. spread d. discount e. call price

C

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the: Select one: a. legal bounds b. trustee relationships c. protective conenants d. "plain vanilla" conditions e. bylaws

C

The liquidity premium is compensation to investors for: Select one: a. acquiring a bond with an unfavorable tax status b. purchasing a bond that has defaulted on its coupon payments c. the lack of an active market wherein a bond can be sold for its actual value d. purchasing a bond in the secondary market e. redeeming a bond prior to maturity

C

The liquidity premium is compensation to investors for: Select one: a. redeeming a bond prior to maturity b. acquiring a bond with an unfavorable tax status c. the lack of an active market wherein a bond can be sold for its actual value d. purchasing a bond that has defaulted on its coupon payments e. purchasing a bond in the secondary market

C

Which of the following defines a note? I. secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years Select one: a. II and IV only b. I and IV only c. II and III only d. I and III only e. III only

C

Which one of t he following is the price a dealer will pay to purchase a bond? Select one: a. bid-ask spread b. par value c. bid price d. call price e. asked price

C

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? Select one: a. liquidity b. inflation c. default risk d. interest rate risk e. taxability

C

All else constant, a bond will sell at ____ when the coupon rate is ____ the yield to maturity. Select one: a. par; less than b. a premium ; equal to c. a discount; higher than d. a discount; less than e. a premium; less than

D

All else constant, a bond will sell at ____ when the coupon rate is ____ the yield to maturity. Select one: a. par; less than b. a premium; less than c. a discount; higher than d. a discount; less than e. a premium ; equal to

D

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? Select one: a. yield b. coupon c. discount d. face value e. dirty price

D

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? Select one: a. coupon rate b. face rate c. call rate d. yield to maturity e. interest rate

D

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? Select one: a. interest rate b. call rate c. face rate d. yield to maturity e. coupon rate

D

Real rates are defined as nominal rates that have been adjusted for which of the following? Select one: a. default risk b. accrued interest c. interest rate risk d. inflation e. both inflation and interest rate risk

D

The Fisher effect is defined as the relationship between which f the following variables? Select one: a. nominal rates, real rates, and interest rate risk premiium b. real rates, interest rate risk premium, and nominal rates c. interest rate risk premium, real rates, and default risk premium d. real rates, inflation rates, and nominal rates e. default risk premium, inflation risk premium, and real rates

D

The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? Select one: a. zero-coupon b. note c. callable d. debenture e. discounted

D

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on the bond? Select one: a. increase the coupon rate b. decrease the coupon rate c. increase the time period d. decrease the market price e. increase the market price

D

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on the bond? Select one: a. increase the coupon rate b. increase the time period c. decrease the coupon rate d. decrease the market price e. increase the market price

D

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: Select one: a. equilibrium b. call price c. premium d. spread e. discount

D

The interest rate risk premium is the: Select one: a. difference between the market interest rate and the coupon rate b. additional compensation paid to investors to offset rising prices c. difference between the coupon rate and the current yield d. compensation investors demand for accepting interest rate risk e. difference between the yield to maturity and the current yield

D

The interest rate risk premium is the: Select one: a. difference between the market interest rate and the coupon rate b. additional compensation paid to investors to offset rising prices c. difference between the yield to maturity and the current yield d. compensation investors demand for accepting interest rate risk e. difference between the coupon rate and the current yield

D

The specified date on which the principal amount of a bond is payable is referred to as which one of the following? Select one: a. coupon date b. dirty date c. yield date d. clean date e. maturity

D

The taxability risk premium compensates bond holders for which one of the following? Select one: 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

D

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? Select one: a. interest rate risk b. taxability c. liquidity d. default risk e. inflation

D

A $1,00 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? Select one: a. dirty price b. redemption value c. original-issue discount d. redemption discount e. call premium

E

A $1,00 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? Select one: a. original-issue discount b. redemption value c. redemption discount d. dirty price e. call premium

E

A bond is quoted at a price of $989. This price is referred to as which one of the following? Select one: a. dirty price b. wholesale price c. face price d. call price e. clean price

E

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? Select one: a. senior b. zero coupon c. unsecured d. collateralized e. callable

E

A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? Select one: a. unsecured b. zero coupon c. collateralized d. senior e. callable

E

A bond that has only one payment, which occurs at maturity, defines which one of the following? Select one: a. callable b. debenture c. junk d. floating-rate e. zero coupon

E

A deferred call provision is which one of the following? Select one: a. requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer 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. requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond d. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity e. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

E

Atlas Entertainment has a 15-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. Select one: a. at par b. as debentures c. as callable d. in street form e. in registered form

E

The Fisher effect is defined as the relationship between which f the following variables? Select one: a. real rates, interest rate risk premium, and nominal rates b. default risk premium, inflation risk premium, and real rates c. interest rate risk premium, real rates, and default risk premium d. nominal rates, real rates, and interest rate risk premiium e. real rates, inflation rates, and nominal rates

E

The current yield is defined as the annual interest on a bond divided by which one of the following? Select one: a. call price b. coupon c. dirty price d. face value e. market price

E

The current yield is defined as the annual interest on a bond divided by which one of the following? Select one: a. face value b. dirty price c. call price d. coupon e. market price

E

The pure time value of money is known as the: Select one: a. interest rate factor b. inflation factor c. liquidity effect d. Fisher effect e. term structure of interest rates

E

The specified date on which the principal amount of a bond is payable is referred to as which one of the following? Select one: a. coupon date b. dirty date c. yield date d. clean date e. maturity

E

You want to buy a bond from a dealer. Which one of the following prices will you pay? Select one: a. auction price b. bid-ask spread c. bid price d. call price e. asked price

E

The pure time value of money is known as the: Select one: a. inflation factor b. Fisher effect c. term structure of interest rates d. liquidity effect e. interest rate factor

c