Fin Exam 3-2
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1. Thestated interest payment, in dollars, made on a bond each period is called thebond’s:
Theprincipal amount of a bond that is repaid at the end of the loan term is calledthe bond’s:
26. Afinancial market is transparent if it is possible to easily observe its prices andtrading volume.
The annual coupon payment of a bond divided byits market price is called the:
The price a dealer is willing to pay for asecurity held by an investor is called the:
The price a dealer is willing to accept forselling a security to an investor is called the:
Interest rates or rates of return on investments that have not been adjusted for the effects of inflation are called _____ rates.
Interest rates or rates of return on investmentsthat have been adjusted for the effects of inflation are called _____ rates.
The relationship between nominal rates, realrates, and inflation is known as the:
TERM STRUCTURE OF INTEREST RATES
The relationship between nominal interest rateson default-free, pure discount securities and the time to maturity is calledthe:
The _____ premium is that portion of a nominalinterest rate or bond yield that represents compensation for expected future overallprice appreciation.
DEFAULT RISK PREMIUM
The _____ premium is that portion of a nominalinterest rate or bond yield that represents compensation for the possibility ofnonpayment by the bond issuer.
A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____and interest payments in the amount of _____ each.
BOND PRICES AND YIELDSe 37.
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a discount; higher than
BOND PRICES AND YIELDSd 38. All else constant, a coupon bond that is selling at a premium, must have:
a yield to maturity that is less than the couponrate
c 39. The market price of a bond is equal to the present value of the:
face value plus the present value of the annuity payments.
BOND PRICESa 40. As the yield to maturity increases, the:
amount the investor is willing to pay to buy a bond decreases.
SEMIANNNUAL BONDSe 41. American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.
e. I,III, and IV only
SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATE
42. Thenewly issued bonds of the Wynslow Corp. offer a 6 percent coupon withsemiannual interest payments. The bonds are currently priced at par value. Theeffective annual rate provided by these bonds must be:
d. greaterthan 6 percent but less than 7 percent.
INTEREST RATE RISK
43. Whichone of the following statements is correct concerning interest rate risk as itrelates to bonds, all else equal?
INTEREST RATE RISK
Which one of the following bonds has thegreatest interest rate risk?
e. 9-year; 7 percent coupon
INTEREST RATE RISKb 45. Interest rate risk _____ as the time to maturity increases.
increases at a decreasing rate
INTEREST RATE RISKc
You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:
to realize a capital loss if you sold the bondat the market price today.
INTEREST RATE RISK
47. You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase
long-term; zero coupon
YIELD TO MATURITY AND CURRENT YIELDe 48. All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____
Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principle is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.
d. II and IV only
BOND INDENTUREd 50. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. protective covenants
d. I, II, and IV only
Callable bonds generally:
are associated with sinking funds.
PROTECTIVE COVENANTSc 53. Which of the following is a (are) positive covenant(s) that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
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.
c. I and IV only
PROTECTIVE COVENANTSe 54. Protective covenants:
are primarily designed to protect bondholders from future actions of the bond issuer.
BOND RATINGSb 55. Which one of the following statements concerning bond ratings is correct?
Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
BOND RATINGSd 56. A “fallen angel” is a bond that:
has moved from being an investment-grade bond tobeing a junk bond.
TREASURY BONDSa 57. Bonds issued by the U.S. government:
I. are considered to be free of default risk.
II. are considered to be free of interest rate risk.
III. provide totally tax-free income. IV. pay interest that is exempt from federal income taxes.
a. I only
TREASURY BONDSd 58. Treasury bonds are:
those bonds issued by any governmental agency in the U.S.
MUNICIPAL BONDSa 59. Municipal bonds:
offer income tax advantages to individuals.
TAXABLE VERSUS MUNICIPAL BONDSd 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:
.07 ´ (1 - t*) = .05.
ZERO COUPON BONDSe 61. A zero coupon bond:
has implicit interest which is calculated by amortizing the loan.
ZERO COUPON BONDSb 62. The total interest paid on a zero-coupon bond is equal to:
b. the face value minus the issue price.
FLOATING-RATE BONDSd 63. The collar of a floating-rate bond refers to the minimum and maximum:
FLOATING-RATE BONDSd 64. Which of the following are common characteristics of floating-rate bonds?
I. adjustable coupon rates
II. adjustable maturity dates
III. put provision
IV. coupon cap
d. I, III, and IV only
FLOATING RATE BONDSc 65. A corporation is more prone to issue floating-rate bonds when they expect future interest rates to _____ over the life of the bond.
CATASTROPHE BONDSe 66. “Cat” bonds are primarily designed to help:
insurance companies recover from natural disasters.
TYPES OF BONDS AND INVESTOR PREFERENCESc 67. Investors generally tend to buy:
convertible bonds for their potential price appreciation.
TYPES OF BONDSb 68. A convertible bond is a bond that can be:
exchanged for a stated number of shares of common stock of the bond issuer.
PUT PROVISIONc 69. A put provision in a bond indenture allows:
the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
BOND TRADINGb 70. If you want to sell a bond issued by a smaller corporation, you:
may encounter difficulties in executing the trade.
BASIS POINTa 71. One basis point is equal to:
CORPORATE BOND QUOTE
c 72. The “EST SPREAD” shown in The Wall Street Journal listing of corporate bonds represents the estimated:
difference between the bond’s yield and the yield of a particular Treasury issue.
TREASURY BOND QUOTE
A Treasury bond that is quoted at 100:07 is selling:
for about $2.19 over face value.
TREASURY BONDSb 74. As of 2004, the longest maturity Treasury security currently being issued is the:
BID VERSUS ASKED PRICESa 75. A Treasury bond has an asked quote of 100:12 and a bid quote of 100:11. One bond:
can be purchased at a price of $1,003.75.
CLEAN VERSUS DIRTY PRICESc 76. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays interest on February 1 and August 1. The price you will pay to purchase this bond is equal to the:
REAL RATE OF RETURNd 77. The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.
FISHER EFFECTe 78. The Fisher formula is expressed as:
e. 1 + R = (1 + r) ´ (1 + h).
FISHER EFFECTd 79. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor’s rate of return.
TERM STRUCTURE OF INTEREST RATESa 80. The term structure of interest rates reflects the:
pure time value of money for various lengths oftime.
TERM STRUCTURE OF INTEREST RATESd 81. Which of the following statements are correct concerning the term structure of interest rates?
I. The outlook for future inflation influences the shape of the term structure of interest rates.
II. The term structure of interest rates includes only the real rate of return and the inflation premium.
III. The interest rate risk premium is included in the term structure of interest rates.
IV. The term structure of interest rates can be downsloping.
d. I, III, and IV only
CORPORATE VERSUS TREASURY BONDSc 82. Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:
c. taxesand potential default.
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