FI 301 Ch 7

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FI 301 Ch 7
2013-03-02 19:55:58
Finance 301

Notecards for Chapter 7
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  1. _______ bonds require the owner to clip couponsattached to the bonds and send them to the issuer to receive coupon payments.
  2. Note maturities are usually _______, while bond maturities are _______.
    less than 10 years; 10 years or more
  3. Investors in Treasury notes and bonds receive _______interest payments from the Treasury.
  4. Since 2001, the Treasury has relied on _______-year bonds to finance the U.S. budget deficit.
  5. Interest earned from Treasury bonds is:
    exempt from state and local taxes
  6. _______ bids for Treasury bonds specify a pricethat the bidder is willing to pay and a dollar amount of securities to bepurchased.
  7. Treasury bond dealers:
    may trade Treasury bonds among themselves
  8. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $_______.
  9. Bonds issued by the _______ are backed by the federal government.
    Government National Mortgage Association (Ginnie Mae)
  10. Municipal general obligation bonds are _______. Municipal revenue bonds are _______.
    supported by the municipal government’s ability to tax; supported by revenue generated from the project
  11. In general, variable-rate municipal bonds aredesirable to investors who expect that interest rates will _______.
  12. The municipal yield curve is typically _______than the Treasury yield curve, and the shape of the municipal yield curve is _______the shape of the Treasury yield curve.
    higher; similar to
  13. Corporate bonds that receive a _______ rating from credit rating agencies are normally placed at _______ yields.
    higher; lower
  14. Which of the following institutions is most likely to purchase a private bondplacement?
    insurance company
  15. A protective covenant may:
    restrict the amount of additional debt the firm can issue
  16. A call provision normally:
    requires the firm to call bonds at a price above par value
  17. When would a firm MOST likely call bonds?
    after interest rates have declined
  18. Assume U.S. interest rates aresignificantly higher than German rates. A U.S. firm wanting to issue bondscould achieve a lower financing rate, without exchange rate risk, bydenominating the bonds in:
    euros and making payments from a German subsidiary
  19. Bonds that are NOT secured by specific property are called
  20. Bonds that are secured by personal property are called:
    chattel mortgage bonds
  21. The coupon rate of most variable-rate bonds is tied to:
  22. Assume that you purchased corporate bonds oneyear ago that have no protective covenants. Today, it is announced that thefirm that issued the bonds plans a leveraged buyout. The market value of yourbonds will likely _______ as a result.
  23. About _______ of all junk bonds issues are usedto finance takeovers.
  24. _______ bonds have the MOST active secondary market
  25. Some bonds are "stripped," which means that:
    they are transferred into principal-only and interest-only securities
  26. _______ are NOT primary purchasers of bonds
    Finance companies
  27. Leveraged buyouts are expected to _______ managerial efficiency and _______ the level of corporate debt.
    increase; increase
  28. As a result of the Financial Institutions ReformRecovery and Enforcement Act (FIRREA), savings institutions were required tophase out their investment of _______ bonds.
  29. Which of the following statements is true regarding STRIPS?
    They are created and sold by various financial institutions
  30. (Financial calculator required.) Harry Potter can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Mr. Potter’s yield to maturity is _______ percent.
  31. (Financial calculator required.) Ed Wood, aprivate investor, can purchase $1,000 par value bonds for $980. The bonds havea 10 percent coupon rate, pay interest annually, and have 20 years remaininguntil maturity. Mr. Wood’s yield to maturity is _______ percent.
  32. Jim Carrey, a private investor, purchases $1,000par value bonds with a 12 percent coupon rate and a 9 percent yield tomaturity. Mr. Carrey will hold the bonds until maturity. Thus, he will earn areturn of _______ percent.
  33. Which of the following is NOT true regarding zero-coupon bonds?
    • A)    They are issued at a deep discount from par value.
    • B)     Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.
    • C)     The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest
    • .D)    Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts.
    • E)     All of these are true regarding zero-coupon bonds.
  34. Which of the following is not true regarding the call provision?
    The difference between the market value of the bond and the par value is called the call premium
  35. If interest rates suddenly _______, thoseexisting bonds that have a call feature are _______ likely to be called.
    decline; more
  36. Which of the following is NOT mentioned in the the text as a protective covenant?
    the appointment of a trustee in all bond indentures
  37. The yield to maturity is the annualized discountrate that equates the future coupon and principal payments to the initialproceeds received from the bond offering.
  38. Treasury bond auctions are normally conducted only at the beginning of each year.
  39. Under the STRIP program created by the Treasury,stripped securities are created and sold by the Treasury.
  40. The yield curve for corporate bonds is normallyaffected by interest rate expectations, a liquidity premium, and the specificmaturity preferences by corporations issuing bonds.
  41. A private bond placement has to be registered with the SEC.
  42. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.
  43. Bonds are issued in the primary market through a telecommunications network.
  44. Corporate bonds, can be placed with investors through a public offering or a private placement.
  45. When a corporation issues bonds, it normallyhires an investment bank that targets large institutional investors such aspension funds, bond mutual funds, and insurance companies.
  46. Rule 144A allows small individual investors totrade privately-placed bonds (and some other securities) with each otherwithout requiring the firms that issued the securities to register them withthe SEC.
  47. Rule 144A creates liquidity for securities that are privately placed.
  48. Corporate bonds are more standardized than stocks.
  49. Structured notes are issued by firms to borrowfunds, and the repayment of interest and principal is based on specified market conditions
  50. Bonds issued by large well-known corporations inlarge volume are illiquid because most buyers hold these bonds until maturity.
  51. The over-the-counter bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
  52. Bond dealers do NOT have an inventory of bonds
  53. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.
  54. Many bonds are listed on the New York Stock Exchange (NYSE).