Finance 5 & 6
A bond that was previously rated as investment grade but has been downgraded to a junk bond status is called a:
fallen angel
A ......................... is an unsecured bond, for which no specific pledge of property is made.
debenture
The bond-ratings of Moody's and Standard and Poor's are concerned only with the possibility of ...................; these bond ratings do not address the volatility of the bond price due to .....................
default; interest rate risk
Bonds are rated according to the likelihood of ................; high ratings indicate ................ probability of default.
default; low
When a bond cannot be called for a number of years after issue; this is a .............. call, and the bond is ..................... during this period.
deferred; call protected
A bond selling for less than the face value is a ...................; and a bond with the yield to maturity higher than the coupon rate is ..........................
discount bond; discount bond
If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:
downward-sloping.
Which one of the following statements is true? a- The current yield on a par value bond will exceed the bond's yield-to-maturity. b- The yield to maturity on a premium bond exceeds the bond's coupon rate. c- The current yield on a premium bond is equal to the bond's coupon rate. d- A premium bond has a current yield that exceeds the bond's coupon rate. e- A discount bond has a coupon rate that is less than the bond's yield to maturity.
e- A discount bond has a coupon rate that is less than the bond's yield to maturity.
The value of a bond is dependent upon the:
coupon rate and the yield to maturity.
T/F Face value and par value are synonymous terms.
true
T/F To determine the value of a bond at a particular point in time we use the yield to maturity, which is the market interest rate at that time for bonds with similar features.
true
Which one of the following terms denotes for certain that a bond is unsecured?
Debenture
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
Default risk premium
represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?
Default risk premium
A par value bond is a bond having the following features: I- yield to maturity equals the coupon rate II- market price lower than the face value III- market price equal to the face value
I and III only
Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.? I. registered form II. bearer form III. quarterly coupon payments IV. semiannual coupon payments
I and IV only
Which of the following can generally be found in a bond's indenture agreement? I. terms of repayment II. names of registered shareholders III. protective covenants IV. total amount of the bond issue
I, III, and IV only
A real rate of return is defined as a rate that has been adjusted for which one of the following?
Inflation
Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?
Interest rate risk premium
Which one of the following statements is correct regarding mortgage backed securities (MBSs)?
Investors in MBSs are subject to real estate deflation risk.
Which one of the following might be included in a bond's list of negative protective covenants?
Limiting cash dividends to $1 per share or less
Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?
Liquidity premium
The term structure of interest rates represents the relationship between which of the following?
Nominal rates on Treasury Securities and time to maturity
premiums is paid on a corporate bond due to its tax status?
Taxability premium
Which one of the following bonds is most apt to have the smallest or no liquidity premium?
Treasury bill
Which of the following statements is TRUE if you increase your monthly payment above the required loan payment?
You can significantly reduce the number of payments needed to pay off the loan.
Which of the statements below is FALSE? a- Reducing principal at a faster pace reduces the overall interest paid on a loan. b- The more frequent the payment, the lower the total interest expense over the life of the loan, even though the effective rate of the loan is higher. c- Reducing principal at a faster pace increases the overall interest paid on a loan. d- Monthly interest on a loan is equal to the beginning balance times the periodic interest rate.
c- Reducing principal at a faster pace increases the overall interest paid on a loan.
Which of the below is NOT a major component of the term structure of interest rates? a- interest rate risk premium b- Inflation premium c- default risk premium d- real interest rate
c- default risk premium
....................... is the right of the bond's issuer to repurchase the bond at a predetermined price prior to maturity. However, the ...................... is the provision prohibiting the company from redeeming the bond prior to a certain date.
call provision; deferred call provision
A ........................... allows the issuer to repurchase the bond debt issue prior to maturity. In most cases, the call price will be equal to the ..............................of the bond plus a ...........................
call provision; face value; call premium
A bond that has the features of both debt and equity, and can be exchanged for shares of stock of the issuing firm is calle
convertible bond
bond coupon payments are calculated based on the ..................... when the bond is issued. However, bond valuation requires that we determine the ......................, which is the market required rate of return on that bond at the time of the valuation.
coupon rate; yield to maturity
Which of the statements below is FALSE? a- If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period. b- The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments. c- The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full. d- The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
d- The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.
A premium bond is a bond that:
has a market value greater than the par value
The coupon payments of a ..................... bond are paid only when the firm's income is sufficient to do so. A ............. Bond can be swapped (exchanged) for a fixed number of stocks.
income; convertible
The written agreement between the corporation and the lender detailing the terms of the debt issue is called the bond:
indenture
A ............................. bond is a bond that pays fixed coupon payments at regular period of time. A ........................ bond is a bond that is sold at a deep discount and it makes only one payment at maturity.
level-coupon; zero-coupon
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.
maturity
A .................. is an unsecured debt that generally matures in less than ten years; a .......................... is an unsecured debt that generally matures in ten years or more
note; debenture
Municipal bonds
pay interest that is federally tax exempt
When the yield to maturity is lower than the coupon rate, the bond should be:
premium bond
The value of a bond equals to the sum of the .......................... of both the future................ and the ........................
present value; coupon payments; face value
The primary purpose of protective covenants is to help:
protect bondholders from issuer actions.
A .................. restricts actions of the bond issuer. A ...................... restricts the issuer actions, where as a .................. requires that certain actions be taken by the corporation
protective covenant; negative covenant; positive covenant
A bond that gives the bondholder the right to force the issuer to purchase the bond at a stated price is called:
put bond
The yield to maturity for a bond is the bond's .................. When the market value of the bond is equal to its face value, the yield to maturity should be equal to the .................
rate of return; coupon rate
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
real rate
If a bond is ................, the company's registrar mails the interest payment to the owner of record. However, ....................... bonds have dated coupons attached to them; the bondholder has to detach a coupon and mail to the firm which then makes the interest payment.
registered; bearer
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.
semi-annually
.....................governs priority of payment to creditors in the event of bankruptcy. A debt is........................ when creditors must be repaid first.
seniority; subordinated
the account managed by the bond trustee for the purpose of the early bond redemption is the:
sinking fund
An upward-sloping term structure of interest rates indicates
the nominal rate is increasing even though the real rate is constant as the time to maturity increases.
Nominal interest rates are roughly speaking the sum of two major components. These components are ________.
the real interest rate and expected inflation
The Fisher Effect tells us that the true nominal rate is actually made up of three components. These three components are ________.
the real rate, the inflation rate, and the product of the real rate and inflation
A ..................... bond have no default risk. A .................. bond carries some default risk and is exempt from federal income taxation.
treasury; municipal;
A ....................... bond makes no coupon payments, and is initially priced at a deep discount from par value. A......................... bond has adjustable coupon payments, which are tied to a specific index.
zero-coupon; floating-rat
