FI 414 Final Exam CH 10

Bonds issued in the currency of the issuer's country but sold in other national markets are called ________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

A. Eurobonds

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III only

A. I and II only

A _________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

A. callable

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

A. expected increase in inflation over time

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A. higher

The _________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

A. indenture

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion rate

A. its coupon rate is greater than its yield to maturity

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

A. lower than

The primary difference between Treasury notes and bonds is _________. A. maturity at issue B. default risk C. coupon rate D. tax status

A. maturity at issue

A collateral trust bond is ____________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property by the firm D. unsecured

A. secured by other securities held by the firm

In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A. shape of the bond price curve with respect to interest rates

Serial bonds are associated with _________. A. staggered maturity dares B. collateral C. coupon payment dates D. conversion features

A. staggered maturity dates

The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

A. stated or flat price in a quote sheet plus accrued interests

A 1% decline in yield will have the least effect on the price of a bond with a ________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

B. 10-year maturity, selling at 100

Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B. BBB

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

B. II and III

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term than on long-term bonds B. a higher yield on long-term than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options

B. a higher yield on long-term than on short-term bonds

Which one of the following bonds would most likely sell at the lowest price? A. a callable debenture B. a puttable mortgage bond C. a callable mortgage bond D. a puttable debenture

B. a potable mortgage bond

The __________ of a bond is computed as the ration of the annual payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

B. current yield

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B. decrease

A bond was purchased at a premium and is now selling at a discount because of a charge in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. increased B. decreased C. stayed the same D. the answer cannot be determined from the information given

B. decreased

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

B. horizon analysis

Which one of the following statements is correct? A. invoice price = flat price - accrued interest B. invoice price = flat price + accrued interest C. flat price = invoice price + accrued interest D. invoice price = settlement price - accrued interest

B. invoice price = flat price + accrued interest

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B. longer; lower

________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C. STRIPS

Inflation-indexed Treasury securities are commonly called ____________. A. PIKs B. CARs C. TIPS D. STRIPS

C. TIPS

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

C. capital loss; capital gain

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. asset-backed bonds B. TIPS C. catastrophe D. pay-in-kind

C. catastrophe

In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. zero-coupon bonds B. coupon bonds selling at discount C. coupon bonds selling at premium D. floating-rate bonds

C. coupon bonds selling at premium

Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment rate C. coupon rate D. dividend yield

C. coupon rate

Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

C. holder

TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C. increasing both the par value and the coupon payment

TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

C. indexed bonds

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

C. inverse floaters

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. mortgage bonds B. senior debentures C. preferred stock D. equipment obligation bonds

C. preferred stock

A ________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C. puttable

A mortgage bond is ____________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C. secured by property owned by the firm

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

C. taxation

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. both bonds are examples of Eurobonds B. the Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond C. the U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond D. neither bond is a Eurobond

C. the U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

D. I, II, and III

The issuer of _______ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind

D. a pay-in-kind

You would typically find all but which one of the following in a bond contract? A. a dividend restriction clause B. a sinking fund clause C. a requirement to subordinate any new debt issued D. a price-earnings ration

D. a price-earnings ration

According to the liquidity preference theory of the term structure of interest rate, an increase in the yield on long-term bonds versus short-term bonds could be due to __________. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

D. an increase in expected interest rate volatility

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D. both bonds will decrease in value but bond B will decrease more than bond A

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

D. junk bonds

Which one of the following possible provisions of a bond indenture is designed to ease the burden of principle repayment by spreading it out over several years. A. callable feature B. convertible feature C. subordination clause D. sinking fund

D. sinking fund

A debenture is ____________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

D. unsecured