Chapter 7 Q & A's

Nominal rate of return equation Example: real rate of return of 3.03, Inflation rate of 4.68

Nominal (R) = (1+r) x (1+h) - 1 R = (1.0303) x (1.0468) -1 R = 7.85%

104. A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for the same period was 6.10 percent. What was the actual rate of return (r) on this bond for last year?

r = (1 + coupon rate) / (1 + Inflation rate) - 1 = (1.0747)/(1.0610) - 1 =1.29%

Real Rate of Return equation Example: nominal rate(YTM) of 8.46 percent, Inflation rate of 5.08 percent

r = (1+R)/(1+h) - 1 r = (1.0846)/(1.0508) - 1 = 3.22%

70. not on exam

section 7.5

90. The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 9.17 percent. How many years is it until these bonds mature?

use Calc: I/Y: 9.17/2 = 4.585 PV: -319.24 FV: 1000 CPT N = 25.47/2 = 12.73 years

Current yield Equation

= annual coupon / annual quoted coupon (coupon rate x face value) / (quoted rate x face value) x 100

103. The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285%. What is the amount of each payment if the face value of the bonds if $1,000?

1st Calc: r .086285 = (1 +r/2)^2 - 1 r = .0845 2nd calc: Semiannual interest payment = (r x face value)/2 =(.0845 x 1000) / 2 = $42.24

Real rate of return equation Example: YTM 5.28, Inflation rate 4.1

= (1 + yield to maturity) / (1 + inflation rate) - 1 example: (1.0528) / (1.041) - 1 =1.13%

1. Mary just purchased a bond which pays $60 a year in interest. What is the $60 called? A. Coupon B. Face Value C. discount D. call premium e. yield

A. Coupon

126. You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 9.4 percent, and there are 3 month to the next semiannual coupon date. What is the clean price of this bond?

Accrued Interest = (.094 x 1000) x (3/12) = 23.5 Clean Price = $1460 - 23.5 = 1436.6

Not On exam: 68.

B. 5-year TIPS

2. 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? A. coupon B. face value c. discount d. yield e. dirty price

B. Face Value

Which of the following statements concerning bonds are correct? I bonds provide tax benefits to issuers II. the risk of a firm financially failing increases when the firm issues bonds III. Most long-term bond issues are referred to as unfunded debt IV. All bonds are treated equally in a bankruptcy proceeding

B. I and II only I. Bonds provide tax benefits to issuers II. The risk of a firm financially failing increases when the firm issues bonds

34. An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely to his bond today if the current yield-to-maturity is 7 percent? I. a structure as an interest-only loan II. A current yield that equals the coupon rate III. A yield-to-maturity equal to the coupon rate IV. a market price that differs from the face value

B. I and IV only I. a structure as an interest-only loan IV. a market price that differs from the face value Section: 7.1

53. Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ration of 1.10 or better II. No debt senior to this issue can be issued III. the company cannot lease any major assets without approval by the lender IV. The company must maintain the loan collateral in good working order.

B. II and III only II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender.

79. Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security? I. Inflation risk II interest rate risk III. taxability IV. default risk

B. III and IV only

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

B. The lack of an active market wherein a bond can be sold for its actual value

29. The interest rate risk premium is the:

B. compensation investors demand for accepting interest rate risk. Section: 7.7

8. Atlas Entertainment has 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: a. at pay b. in registered form c. in street form d. as debentures e. as callable

B. in registered form

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

C. Face Value

43. Which of the following increase the price sensitivity of a bond to changes in interest rates? i. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate

C. I and IV only I. increase in time to maturity IV. decrease in coupon rate

78. Which of the following statements is correct concerning the term structure of interest rates? I. expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates II. The term structure of interest rates includes both an inflation premium and an interest rate premium III. The real rate of return has minimal, if any, affect of the slope of the term structure of interest rates IV. The term structure of interest rates and the time to maturity are always directly related

C. I, II, and III only

39. Which of the following relationships apply to a par value bond? I. coupon rate < yield to maturity II. coupon yield = yield to maturity III. market price = call price IV. market price = face value

C. II and IV only II. coupon yield = yield to maturity IV. market price = face value Section 7.1 & 7.2

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

C. Maturity

55. Which one of the following statements concerning bond ratings is correct? a. investment grade bonds are rated BB or higher by Standards & Poors b. Bond ratings assess both interest rate risk and default risk C. Split rated bonds are called crossover bonds D. the highest rating issued by Moody's is AAA e. A "fallen andel" is a term applied to all "junk" bonds

C. Split rated bonds are called cross over bonds

not on exam 69.

C. Warrant

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

C. bearer form

95. The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call cerium on a $1,000 par value bond?

Call Premium = call price - face value Call Premium = 1,054 - 1,000 =$54

93. Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4/ The bonds have a 5 percent coupon rate. What is the current yield?

Current Yield = (coupon rate x face value)/(quoted rate x face value) =(.05 x 1000)/(.0984 x 1000) = 5.08%

100. A corporate bond is quoted at a price of 103.16 and carries a 6.50 percent coupon. The bonds pays interest semiannually. What is the current yield on one of these bonds?

Current yield = (coupon rate x Face value) / (quoted rate x face value) =65/1031.6= .0630 =6.30%

94. The outstanding bonds of the River Front Ferry carry a 6.5% coupon. The bonds have a face value of $1,000 and are currently quoted at 101.6. What is the current yield on these bonds?

Current yield = (coupon rate x face value)/(quoted rate x face value) =65/1016 = 6.40%

11. Which of the following defines a note? I. Secured II. unsecured III. maturity less than 10 years IV. maturity in excess of 10 years

D. II and III only

50. Texas Foods has a 6 percent bond issue outstanding that pays $30 in interest every march and september. The bonds are investment grade and sell at par. The bonds are callable at a price equal to the present balue of all future interest and principal payments discounted at a rate equal to the comparable Treasury plus .50 percent. Which of the following correctly describe the features of this bond? I. bond rating of B II. "make whole" call price III. $1,000 face value IV. Offer price of $1,000

D. II, III, and IV only II. "Make Whole" call price III. $1,000 face value IV. offer price of $1,000

5. 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 of the following? a. coupon rate b. face rate c. call rate d. yield to maturity e. interest rate

D. Yield to maturity

15. A deferred call provision is which of the following?

D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

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

D. real rates, inflation rates, and nominal rates Section: 7.6

Liquidity risk Definition and how it relates to bonds and bond yields

Def: The inability to quickly sell a bond for its full value Use: Exists primarily in thinly traded issues

Taxability risk definition and how it relates to bonds and bond yields

Def: reflects the fact that that bond interest can be taxed differently at the federal, state, and local levels and that these tax rates can change

Default risk Definition and how it related to bond and bond yields

Def: the likelihood the issuer will default on its bond obligations Use: the basis for bond ratings

Describe the relationships between: Coupon rate, Yield to maturity, and current yield for both a discount bond and premium bond

Discount Bond: Yield to maturity > current yield > coupon rate Premium Bond: Yield to maturity < current yield < coupon rate

38. Which of the following are characteristics of a premium bond? I. coupon rate < yield to maturity II. coupon rate > yield to maturity III. Coupon rate < current yield IV. coupon rate > current yield

E. II and IV only II. Coupon rate > yield to maturity IV. Coupon rate > current yield Section 7.1

35. A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. Discounted price II. Premium price III. yield-to-maturity that exceeds the coupon rate IV. Yield-to-maturity that is less than the coupon rate

E. II and IV only Premium price and Yield-to-maturity that is less than coupon rate

101. A treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon. the bond pays interest semiannually. What is the current yield on one of these bonds?

First calc: Current price = Quote rate x Face value = 1.0671875 x 1000 = 1067.1875 2nd calc: Current yield = (coupon rate x face value) / (quoted rate x face value) = 35/1067.1875 = .032796 = 3.28%

65. Recently, you discover a potable income bond that is convertible. If you purchase this bond, you will have the right to do which of the following? I. Force the issuer to repurchase the bond prior to maturity II. choose when you wish to receive interest payments III. convert the bond into TIPS IV. convert the bond into equity shares

I and IV only I. Force the issuer to repurchase the bond prior to maturity IV. convert the bond into equity shares

Relationship between inflation and structure of interest rates of bonds

Increase in inflation will increase interest rates you should sell any long-term bonds you own and replace them with short-term longs if you expect inflation you should replace lower coupon bonds with higher coupon bonds

96. A corporate bond was quoted yesterday at 10216 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $6,000?

Market Price = (new quoted price % - old quoted price %) x face value = (1.0219 - 1.0216) x 6000 = $1.80

Study Guide Question: 99. a treasury bond is quoted at a price of 101:14 (101 14/32) with a current yield of 7.236 percent. What is the coupon rate?

Market Price = 101 and 14/32 percent of face = 1.014375 x 1000 = 1014.375 Annual Interest = coupon rate x market price = .07236 x 1014.375 = $73.40 Coupon rate = Annual interest / face value =73.40 / 1000 = .07340 =7.34%

Study Guide Question: 91. A 16-year, 4.5% coupon bond pays interest annually. the bod has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity raises to 5.7% from the current rate of 5.5%?

Use Calc: @ 5.5% n: 16 I/Y: 5.5 PMT: 45 FV: 1000 CPT PV = 895.38 @ 5.7 N: 16 I/Y: 5.7 PMT: 45 FV: 1000 CPT PV = 876.19 % change = (New - Old)/Old % Change = (876.19-895.38)/895.38 = -2.14%

86. Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

Use Calc: I/Y: 16.28/2 = 8.14 PV: -546.19 PMT: 52.5/2 = 26.25 FV: 1000 CPT N = 14.16 / 2 = 7.08 years

87. Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percents How many years is it until this bond matures?

Use Calc: I/Y: 6.72/2 = 3.36 PV: -1023,46 PMT: 70/2 = 35 FV: 1000 CPT N = 25.052/2 = 12.53 years

116. Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity. The bond makes annual payments and currently sells for $861.20. What is the yield to maturity?

Use Calc: N: 10 PV: -861.20 PMT: 70 FV: 1000 CPT I/Y = 9.18

88. You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?

Use Calc: N: 25 x 2 = 50 I/Y: 8.68/2 =4.34 FV: 1000 CPT PV = $119.52

85. Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?

Use Calc: n: 11 I/Y: 11.2 PMT: 95 FV: 1000 CPT PV = $895.43

89. Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5 years. How much will you receive for you bond if the market yield to maturity is currently 5.33 percent?

Use Calc: n: 4.5 x 2 = 9 I/Y: 5.33/2 = 2.665 FV: 1000 CPT PV = $789.22

80. The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently the bonds sell for $989. What is the yield to maturity?

Use Calculator: N: 11 x 2 = 22 PV: -989 PMT: 60/2 = 30 FV: 1000 CPT I/Y = 3.0695 x 2 = 6.14%

81. Greenbrier Industrial Products bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062,50 per bond. The bond matures in 16 years. What is the yield to maturity?

Use Calculator: N: 16 PV: -1062.50 PMT: 76 FV: 1000 CPT I/Y = 6.94%

84. Roadside Mrkets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 6.69 percent?

Use Calculator: n: 10.5 x 2 = 21 I/Y: 6.69/2 = 3.345 PMT: 67.5/2 = 33.75 FV: 1000 CPT PV= $1004.47

Study Guide Question: 83. Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000?

Use Calculator: n: 6 x 2 = 12 I/Y: 7.68/2 = 3.84 PMT: 75/2 = 37.5 FV: 1000 CPT PV = $991.47

82. Collingwood Homes has a bond issue outstanding that pays and 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What us the yield to maturity?

Use Caluclator: N: 18.5 x 2 = 37 PV: -964.20 PMT: 85/2 = 42.5 FV: 1000 CPT I/Y = 4.45 x 2 = 8.90%

60. 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:

a. .05/(1-t*) = .07

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

a. Default risk Section: 7.7

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

a. inflation section: 7.6

44. Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon b. 3-year; 6 percent coupon c. 5-year; 6 percent coupon d. 7-year; 6 percent coupon e. 7-year; 4 percent coupon

b. 3-year; 6 percent coupon

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

b. callable

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

b. early bond redemption

45. As a bond's time to maturity increases, the bonds sensitivity to interest rate risk: a. increases at an increasing rate b. increases at a decreasing rate c. increases at a constant rate d. decreased at in increasing rate e. decreased at a decreasing rate

b. increases at a decreasing rate

62. Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? a. real rate risk b. interest rate risk c. default risk d. liquidity risk e. taxability risk

b. interest rate risk

36. All else constant, a bond will sell at ______ when the coupon rate is __________ the yield to maturity. A. A premium; less than B. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

c. a discount; less than

57. Bonds issued by the U.S. government: a. are considered to be free of interest rate risk b. generally have higher coupons than those gussied by an individual state c. are considered to be free of default risk d. pay interest that is exempt from federal income taxes e. are called "munis"

c. are considered to be free of default risk

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

c. bid price

14. A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus ant accrued interest. The additional $30 is called which of the following? a. dirty price b. redemption calue c. call premium d. original-issue discount e. redemption discount

c. call premium Section 7.2

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

c. clean price section 7.5

47. 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? a. short-term; low coupon b. short-term; high coupon c. long-term; zero coupon d. long-term; low coupon e. long-term; high coupon

c. long-term; zero coupon

64. Last year, you purchased a "TIPS" at par. Since that time, both market interest rates and inflation have increased by .25 percent. Your bond has most likely done which one of the following since last year?

c. maintained a fixed real rate of return

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

c. market price

51. Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest rate of $55 and matures 6 years from now. The face Value is $1,000 and the market price is $1,020. Which one of these terms correcty describes a feature of this debt? a. semi-annual coupon b. discount bond c. note d. trust deed e. collateralized

c. note section 7.2

59. Municipal Bonds: a. are totally risk-free b. generally have higher coupon rates than corporate bond c. pay interest that is federally tax-free d. are rarely callable e. are free of default-risk

c. pay interest that is federally tax-free

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

c. term structure of interest rates Section: 7.7

41. Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? a. the bonds will become discount bonds if the market rate of interest declines. b. the bonds will pay 10 interest payments of $60 each. c. The bonds will sell at a premium if the market rate is 5.5 percent d. the bonds will initially sell at $1,030 each e. The final payment will be in the amount of $1,060

c. the bonds will sell at a premium if the market rate is 5.5 percent Section 7.1

48. a 6 percent, annual coupon rate is currently selling at a premium and matures in 7 years. The bond was origionally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today?

c. the yield to maturity is less than the coupon rate

75. Which one of the following statements is correct?

e. the real rate must be less than the nominal rate given a positive rate of inflation

28. Which one of the following premiums is compensation for expected future inflation? a. default risk b. taxability c. liquidity d. inflation e. interest rate risk

d. Inflation Section: 7.7

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

d. a bond's unfavorable tax status Section: 7.7

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

d. asked price

77. You are trying to compare the present value of two separate streams of cash flows which are equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should yo use to discount the real cash flows? a. 8 percent b. EAR of 8 percent compounded monthly c. comparable risk-free rate d. comparable real rate e. can't compare present values

d. comparable real rate

Not on: 63. The collar of a floating-rate bond refers to the minimum and maximum: a. calls periods b. maturity dates c. market prices d. coupon rates e. yields to maturity

d. coupon rates

37. The Walther 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 this bond? a. increase the coupon rate b. decrease the coupon rate c. increase the market price d. decrease the market price e. increase the time period

d. decrease the market price Section 7.1

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

d. decreasing the time to maturity increases the price of a discount bond, all else constant Section 7.1 & 7.2

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

d. dirty price section 7.5

58. Treasury Bonds are: a. issued by any government agency in the U.S. b. issued only on the first day of each fiscal year by the U.S. Department of Treasury c. bonds that offer the best tax benefits of any bonds currently available d. generally issued as semi-annual coupon bonds e. totally risk-free

d. generally issued as semi-annuall coupon bonds

42. A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: a. 3.5 percent b. greater than 3.5 percent but less than 7 percent c. 7 percent d. greater than 7 percent e. answer cannot be determined

d. greater than 7 percent Section 7.1

61. A zero coupon bond: a. is sold at a large premium b. pays interest that is tax deductible to the issuer when paid c. can only be issued by the U.S. Treasury d. has more interest rate risk than a comparable coupon bond e. provides no taxable income to the bondholder until the bond matures

d. has more interest rate risk than a comparable coupon bond

76. The Fisher Effect primarily emphasizes the effects of __________________ on an investors rate of return a. defauly b. market c. interest rate d. inflation e. maturity

d. inflation

74. Which one of the following rates represents the change, if any, in you purchasing power as a result of owning a bond? a. risk-free rate b. realized rate c. nominal rate d. real rate e. current rate

d. real rate

92. The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 6.5 percent? A. bond price will increase by 57.14 b. bond price will increase by 5.29 percent c. the bond price will decrease by 53.62 d. the bond price will decrease by 5.43 percent

d. the bond price will decrease by 5.43 percent

67. Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?

e. 7-year income bond

66. "cat" bonds are primarily designed to help:

e. Insurance companies fund excessive claims

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

e. Maturity Section 7.7

54. Protective Covenants: a. apply to short-term debt issues but not to long-term debt issues b. only apply to privately issued bonds c. are a feature found only in government-issued bond indentures d. only apply to bonds that have a deferred call provision e. are primarily designed to protect bondholders

e. are primarily designed to protect bondholders section 7.2

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

e. cannot be called during a certain period of time.

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

e. debenture

52. Callable bonds generally: a. great the bondholder the option to call the bond anytime after the deferment period.. b. are callable at par as soon as the call-protection period ends c. are called when market inters rates increase d. are called within the first three years after issuance e. have a sinking fund provision

e. have a sinking fund provision section 7.2

56. A "fallen Angel" is a bon that has moved from: a. being publicly traded to being privately traded b. being a long term obligation to being a short term obligation c. having a yield to maturity in excess of the coupon rate to have yield to maturity that is less than the coupon rate d. senior status to junior status for liquidation purposes e. investment grade to speculative grade

e. investment grade to speculative grade section 7.3

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

e. nominal rates

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

e. protective covenants

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

e. spread

7. An indenture is:

e. the legal agreement between the bon issuer and the bondholders

You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to his bond if the relevant market interest rate is now 5.8%? a. the current yield to maturity is greater than 6 percent b. the current yield is 6 percent c. the next interest payment will be $30 d. the bond is currently called at one-half of its issue price e. you will realize a capital gain on the bond if you sell it today

e. you will realize a capital gain on the bond if you sell it today section 7.1

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

e. zero coupon

Inflation Rate Equation Example: nominal rate of 8.46% and real rate of 3.22 percent

h = (1+R) / (1+r) - 1 h = (1.0846)/(1.0322) - 1 =5.08%