Financial Institutions CH 6
The SEC defines large investors as those with assets of ______ or more, or income above ________ per year in the last two years.
$1,000,000; $200,000
The SEC defines large investors as those with assets of ______ or more, or income above ________ per year for families in the last two years.
$1,000,000; $300,000
Corporate bonds are long-term bonds with a minimum denomination of ______ and coupons that are paid _______.
$1,000; semiannually
The components of a Treasury STRIP are issued to investors in minimum denominations of ______ or in multiples of ______.
$100; $100
The par value of a Treasury security to be resold as a STRIP must be in an amount that will provide semiannual coupon payments of ______ or a multiple of ______.
$100; $100
Treasury notes and bonds are issued in minimum denominations of ______ or in multiples of ______.
$100; $100
On July 1, 2012, you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent and the price quote is 98-6. The last coupon payment was May 1, 2012, and the next payment is November 1, 2012 (184 days later). The accrued interest is:
$132.61. [(8%/2) × 10,000] × (61 days since last coupon/184) = $132.61
On September 1, 2012, an investor purchases a $10,000 par T-bond that matures in 12 years. The coupon rate is 6 percent and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7 percent. The dirty price of the bond is:
$300 × PVIFA (3.5%, 24) + $10,000 × PVIF (3.5%, 24) = $9,197.08; $300 × (70/180) = $116.67; $9,197.08 + $116.67 = $9,313.75 Using the financial calculator: FV = −10,000PMT = −300N = 24I/Y = 3.5Solve for PV to get the clean price of $9,197.08; The accrued interest is (70/180) × 300 = $116.67. The dirty price is $9,197.08 + $116.67 = $9,313.75.
The initial primary market sale for corporate bonds occurs through which of the following methods?
- A private placement to a small group of investors - A public offering using an investment bank as underwriter
The initial primary market sale for municipal bonds occurs through which of the following methods?
- A private placement to a small group of investors - A public offering using an investment bank as underwriter
The major purchasers of bond market securities (investors) are
- corporations. - governments. - households. - foreign investors.
If the market value of the securities the bond holder receives with conversion _______ the market value of the bond, the bond holder will _______.
- does not exceed; not convert - exceeds; convert and take a profit
The major issuers of bond market securities (borrowers) are
- governments. - corporations.
For all three bond rating agencies, ______ risk results in a ______ bond rating.
- higher; lower - lower; higher
Coupon rates on U.S. Treasury notes and bonds are set at multiples of ______ percent when issued.
0.125
Treasury bonds have original issue maturities from over _____ years.
10
Over the period 1994 to 2019, approximately ______ to ______ percent of the U.S. national debt consisted of Treasury notes and bonds.
40; 60
The largest U.S. city to ever suspend payments on its unsecured debt and declare bankruptcy was
Detroit
Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bond holder or the bond issuer IV. Have higher required returns than noncallable bonds
II and IV only
Convertible bonds are: I. options attached to bonds that give the bond holder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.
IV only
If "T" is the marginal income tax rate of the bondholder, then the correct expression for the after-tax return Ra on a taxable bond with before tax yield Rb is _____.
Ra = Rb(1 - T)
All other risks being equal, an investor with a marginal tax rate of "T" would be indifferent between a municipal bond that pays a return of Ra and a corporate bond that pays a return of ______.
Ra/(1 - T)
A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a:
STRIP
Negative yields can and have been bid in the auction for _______, but they cannot be bid in the auction for other types of Treasury notes and bonds.
TIPS
For a Treasury note or bond, the accrued interest is calculated by multiplying the semiannual coupon payment times ______ divided by ______.
actual days since last coupon; actual days in coupon period
The _______ is the yield to maturity on the Treasury STRIP using the ________ in the calculation.
asked yield; ask price
The _______ is the yield to maturity on the Treasury note or bond using the ________ in the calculation.
asked yield; ask price
A sinking fund provision is _______ to investors, so bonds with a sinking fund provision generally have _______ yields than bonds without.
attractive; lower
The bond trustee is frequently a
bank trust department.
Bearer bonds are owned by the _______ and have _______ attached to the bond so the bearer can collect interest payments.
bearer; coupons
Many corporate bond issues include a _______ in their indentures which allows the issuer to require the bond holder to sell the bond back to the issuer at a set price above the par value of the bond.
call provision
Changes in the value of bond indexes can be used by bond traders to evaluate __________ of investing in bonds of different types and maturities.
changes in the attractiveness
In the United States, the quoted price for a Treasury note or bond is the _______ which _______ include the accrued interest.
clean price; does not
A bond that can be exchanged for another security of the issuing firm is called a(n)
convertible bond.
The coupon interest paid periodically on a bond is calculated as the product of the _______ and the _______ of the bond.
coupon rate; face value
Treasury notes and bonds are backed by the full faith and credit of the U.S. government and are considered to be free from
default risk.
The spread measures the return premium a bond earns to compensate the investor for _______, _______ and ________.
default risk; liquidity risk; special bond provisions
Most bonds have a _______ provision in which the right to call the bond is deferred for a period of time for the benefit of the investors.
deferred call
A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principal is paid by final maturity.
false
The dirty price plus accrued interest is called the clean price of the security.
false
Treasury notes, Treasury bonds, and municipal bonds are default risk free.
false
True or false: Yield changes of bond market securities were uncorrelated over the period from 1980 through 2019.
false
With ________ underwriting, the investment bank guarantees the issuer a price for newly issued bonds by purchasing the entire issue at a fixed price.
firm commitment
When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is known as a:
firm commitment.
Two types of municipal bonds exist: _______ and _______ bonds.
general obligation; revenue
Municipal bonds backed by the full faith and credit of the issuer are called ______ bonds. Governments usually rely on ______ to make payments on these bonds.
general obligation; tax collections
Treasury STRIPS are created by and sold to investors through
government securities brokers and dealers.
Due to lack of information on the private placement issuers, interest rates paid to holders of privately placed bonds tend to be ______ interest rates paid on publicly placed issues.
higher than
Bond insurance guarantees that payment will be made to investors in the event the issuer defaults. Bond insurers generally have a ______ credit rating than the bond ______.
higher; issuer
Relative changes in yield spreads can result when the default risk _______ for a firm that has one bond issue with a sinking fund provision and another issue without a sinking fund provision.
increases
For inflation-indexed Treasury notes and bonds, the semiannual coupon payment is calculated using the _______ and the _______.
inflation-adjusted principal value; semiannual coupon rate
The semiannual coupon paid on TIPS securities is based on the _______ and so ________ from period to period.
inflation-adjusted principal; may vary
If the issuing firm is in violation of the bond indentures, the bond trustee _______ and _______.
informs the bondholders; initiates legal action
Currently, only ______ and _______ as defined by the SEC can participate in private placements of bonds.
institutional investors; large investors
When a large state or local government issues municipal bonds, many _______ are interested in underwriting the bonds and the bonds can generally be sold in a _______ market.
investment banks; national
Certain institutional investors are prohibited by state and federal law from investing in bonds that are below ________, called _______ due to their risk.
investment grade; junk bonds
With best efforts underwriting, the _______ assumes the risk that the entire bond issue might not be sold.
issuing firm
Issuers of privately placed bonds tend to be _______ than public issuers.
less well known
Because mortgage bonds are backed with a claim on specific assets of the firm, they are ______ risky and have ______ yields than unsecured bonds.
less; lower
Bond insurance increases the ______ of bonds by making it easier to sell them on the secondary market.
liquidity
Bonds are ________ debt obligations traded in _______ markets.
long-term; capital
Because Treasury notes and bonds are free from default risk, they pay relatively _______ rates of interest to investors.
low
Due to the value of the embedded conversion option to investors, the yields on convertible bonds tend to be _______ the yields on nonconvertible bonds.
lower than
Investors will accept ______ interest rates on municipal bonds than on corporate bonds due the the ______ nature of municipal bonds.
lower; tax-exempt
A bond index reflects both the _________ plus _________ on a particular type of bond.
monthly capital gain or loss; coupon interest paid
Some corporate bonds and most ______ bonds are ______ bonds, meaning that the bond issue contains many maturity dates with a portion of the principal being paid off on each date.
municipal; serial
For inflation-indexed Treasury notes and bonds, the _______ is adjusted to reflect _______.
principal value; inflation
With a _______ bond, the bond owner's identification information is maintained electronically by the issuer and _______ are mailed or wire transferred to the owner.
registered; coupon payments
Private placements of bonds are unregistered but there are restrictions on the _______ of the bonds.
resale
Bonds that are issued to finance a specific revenue-generating project and whose payments are made from those revenues are called _______ bonds.
revenue
By legally documenting the rights and obligations of all parties involved in a bond issue; the bond indenture helps lower the ______ and ______ of the bond issue.
risk; interest cost
Stock warrants are attached to bonds by ______ issuers to make the bond more attractive to investors and ______ the interest rate that must be paid.
risky; reduce
Debenture holders generally receive their promised payments only after all ________ debt holders have been paid.
secured
A STRIP is a Treasury security in which ________ and ________ can be separated and sold as individual securities.
semiannual coupon payments; repayment of principal
Municipal bonds pay coupons
semiannually.
The bond indenture that requires that the issuer retire a portion of the bond principal early over a number of years is called a _________ provision.
sinking fund
Bonds issued with _______ attached give the bond holder the opportunity to purchase common stock of the issuing firm at a specified price up to a specified date, without loss of the underlying bond.
stock warrants
The source of funds for repayment of municipal bonds is _______ or _______.
tax receipts; project revenues
Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.
taxable at the federal level only; exempt from federal taxes
Most secondary bond market trades are carried out on ______ including virtually all _______ transactions.
the OTC market; large
Municipal bonds are not free from default risk. Defaults on municipal bonds tend to rise and fall with
the economy.
The U.S. Treasury issues Treasury notes and bonds to finance ______ and ______.
the national debt; other government expenditures
Treasury STRIPS allow investors to match their ______ with the ______ of the STRIP security.
time preference for funds; maturity date
TIPS are a Treasury offering that protects investors from unexpected increases in inflation.
true
True or false: A secondary market for municipal bonds exists, though it is generally less active than the secondary market for Treasury bonds.
true
True or false: Interest payments on municipal bonds are exempt from federal income taxes and most state and local income taxes.
true
True or false: Stock warrants may be detached from the underlying bond and sold separately to another investor.
true
With firm commitment underwriting, the _______ assumes the risk that the entire bond issue might not be sold.
underwriter
The principal value of a TIPS security is adjusted every six months ______ for inflation or ______ for deflation, as measured by the percentage change in the consumer price index.
upward; downward
Bearer bonds are bonds:
with coupons attached that are redeemable by whoever has the bond.
The interest rate spread is the difference between the yield on ________ and the yield on ___________.
a bond; a Treasury security of similar maturity
Prices of Treasury STRIP securities are quoted as _______ of the ______ of the security.
a percentage; face value
Prices of Treasury notes and bonds are quoted as _______ of the ______ of the security.
a percentage; face value
