7 Debt: Bond Basics

In 2022, a customer buys 1 PDQ 10%, $1,000 par debenture, M '37, at 115. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is:

10.00%

A 12%, $1,000 par corporate bond is trading at $900. What is the current yield?

13.33%

A customer has purchased three different bonds, each yielding 9%, with 5 year, 10 year, and 15 year maturities. If prevailing interest rates drop by 20 basis points, which will show the greatest percentage price change?

15 year maturity

An 8% corporate bond with 20 years left to maturity is currently trading at 120. The bond is callable in 4 years at 104. If a client buys the bond and then the issuer calls it in 4 years, the yield to call will be:

3.57%

A municipal dealer quotes a 9 year, 6% term revenue bond at 109. The yield to maturity is:

4.78%

Which bond will exhibit the greatest price volatility?

8-year bond; 0% coupon; 7% yield; duration of 8.00

A customer buys 1 GE 8%, $1,000 debenture at 85. The bond will mature in 15 years. Interest payment dates on the issue are Jan 1st and July 1st. The yield to maturity on the bond is:

9.73%

Which of the following are investment grade bonds?

A and BBB

Reinvestment risk is a concern for an investor who invests in securities that make periodic payments:

Over long-term time horizons and during time horizons when interest rates are falling

Which risk is unique to investing internationally in less-developed countries?

Political Risk

A customer has heard about the explosive growth in China and wants to make investments in Chinese companies. The customer should be informed about which risks?

Political risk, Exchange Rate risk, Marketability risk, Default risk

Which bond portfolio with a 20-year life would be expected to give the highest long-term return?

Portfolio #3 with an expected rate of return of 10% and a default risk of 20% over the portfolio life

Which of the following would cause the yield curve to be ascending?

Short term yields declining at the same time as long term yields are increasing

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE?

The bond puttable in 10 years will depreciate more than the bond puttable in 5 years

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 8%. Which of the following are TRUE statements about the outstanding 10% issue?

The current yield will be lower than the nominal yield. The dollar price of the bond will be at a premium to par

In 2022, a customer buys 5 GM 10% debentures, M '31, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2024 at 103. If the bonds are called prior to maturity, which statement is TRUE?

The yield to call will be higher than the yield to maturity

An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. Based upon investor expectations as evidenced by the widening of the yield spread, an appropriate investment is:

U.S. Government Bonds

For bonds trading at a premium, rank the yield measures from lowest to highest?

Yield to Call; Yield to Maturity; Current; Nominal

When a bond increases in value due to market demand, this is termed:

appreciation

In 2022, a customer buys 5 GM 10% debentures, M '42. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2031 at 103. The bond is trading:

at a discount

A 65-year old customer wishes to invest part of his retirement funds with the dual objectives of enhanced income and safety of principal. The customer notices that "C" rated corporate bonds yield significantly more than equivalent maturity Treasury issues and asks you, the registered representative, whether these would be an appropriate investment. The best response is to tell the customer that this is a:

bad idea because "C" rated corporate bonds have a much higher risk of default than Treasury issues

All of the following are true statements about discount bonds EXCEPT:

bonds trading at a discount are more likely to be called than bonds trading at a premium

A percentage of par quote is also known as a:

dollar quote

Market uncertainty regarding future interest rate levels would indicate that the yield curve should be:

flat

The current yield of a bond will:

increase as bond prices fall, decrease as bond prices rise

Purchasing power risk is the risk that:

inflation will reduce the value of future interest payments

An investor is most likely to put a bond with a tender option at par when:

interest rates are rising

When a recession is expected:

investors will sell corporate bonds and yields on corporate bonds would increase

The bondholder of a municipal bond issue is the:

lender of the bond proceeds

During a period when the yield curve is inverted:

long term bond prices are more volatile than short term bond prices

The primary reason that services such as Moody's and Standard and Poor's provide bond ratings is to:

measure default risk of different issues

The nominal yield of a bond will:

remain unchanged as bond prices fluctuate

A customer wishes to maximize liquidity and minimize interest rate risk. The best recommendation is (are):

short term maturities

During a period when the yield curve is flat:

short term rates are more volatile than long term rates

The nominal yield on a bond is:

stated interest rate / bond par value

Yield curve analysis is useful for an investor in debt securities because:

the curve shows market expectations for interest rates, investors can compare rates of return relative to changing maturities, the yield of a specific security can be compared to the market expectation for similar securities, the curve can show relative demand for differing maturities by comparing the change in yield to the change in maturity

A serial bond issue is one in which the bonds are issued on:

the same date and mature on different dates

Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT:

the yield curve is used to compare the marketability risk of one issue to that of another

When the yield curve is inverted, all of the following statements are true EXCEPT:

yields on long term securities are higher than those of short term securities

For bonds trading at a discount, rank the yield measures from lowest to highest?

Nominal; Current; Yield to Maturity; Yield to Call

Exchange rate risk is a factor to consider when investing in debt issues:

Outside the U.S. and that are denominated in a foreign currency

Which of the following Moody's MIG ratings are considered non-investment grade?

MIG 3 and SG

Which of the following are required to calculate the yield to maturity of a bond?

Maturity Date, Coupon, Purchase Price, Redemption Price (Par)

Which statements are TRUE?

Most of the value of a bond is established by the present value of the last payment. The lower the coupon of a bond, the greater the bond's price volatility

Which statements are TRUE regarding interest rate movements and their effect on bond prices?

As interest rates move, the price of long term maturities will change faster than short term obligations. As interest rates move, the price of low coupon issues will change faster than high coupon issues

When a bond trades at a premium, which bond yield will be the highest?

Nominal

A debt issue is commonly referred to as "junk" if its credit rating is BELOW:

BBB

The lowest investment grade rating is:

BBB

When a bond trades at a premium, which bond yield will be the lowest?

Basis

Which of the following affect the marketability of corporate bonds?

Bond rating, Maturity, Block size

As interest rates rise, which of the following statements are TRUE?

Bonds trading at large discounts fall faster in price than bonds trading at small discounts. Bonds trading at small premiums fall faster in price than bonds trading at large premiums.

Regarding bonds with put options, which of the following statements are TRUE?

Exercise of the put is at the option of the bondholder. Yields on bonds with put options are lower than similar bonds without this feature

If interest rates decline, which of the following is likely to happen?

Issuers will call outstanding bonds with high interest rates. Issuers will sell new issues with longer maturities

During a period when the yield curve has a normal ascending shape, which statement is TRUE?

Long term bond prices are more volatile than short term bond prices

During periods when a normal yield curve exists, which of the following statements are TRUE?

Long term bond prices are more volatile than short term bond prices, Yields on long term maturities are greater than yields on short term maturities

Which statements are TRUE regarding bonds?

Long term bonds fluctuate more in value than short term bonds due to interest rate movements. Short term maturities are more liquid than long term maturities

Which characteristics make a security most subject to liquidity risk?

Long term maturity and Low credit rating