Deck 10: Fixed-Income Securities

Question 1

Liquid yield option notes or LYONs have which of the following characteristics?
B) I and III only.
C) II and IV only.
D) I and IV only.
D) II and III only

Answer 1

B

Question 2

In general, foreign- pay bonds provide rates of return and diversification effects for U.S. investors.

A) non- competitive; negative
B) competitive; negative
C) competitive; positive
D) non- competitive; positive

Answer 2

C

Question 3

Which one of the following statements concerning Treasury bonds is correct?

A) The coupon rate of a TIPS is adjusted periodically in response to changes in the rate of inflation.
B) All Treasury securities are backed by the "full faith and credit" of the Government.
C) Treasury bonds have maturity dates ranging from two to ten years.
D) Interest earned on Treasury bonds is tax- exempt at the federal level.

Answer 3

B

Question 4

Two years ago, Mathew purchased a 10 year government bond with a yield of 4.75%. Today, the interest rate on government bonds with 8 years to maturity is 3.5%. If Mathew sells his bond today, he most likely will

A) realise a capital loss.
B) sell the bond at par value.
C) realise a capital gain.
D) sell the bond at face value.

Question 5

Bonds are least likely to be called if

A) they are selling at a substantial discount.
B) if they do not mature for at least 5 years.
C) they are selling at a substantial premium.
D) the price is close to par value.

Question 6

Which of the following is most likely to happen with a convertible bond when the market price of the share exceeds the conversion price. The share does not pay a dividend.

A) The issuing company will call the bonds and bondholders will convert them to ordinary shares.
B) Both the issuing company and the bondholders will wait for the bonds to reach their maturity date.
C) The issuing company will call the bonds and the bondholders will redeem them for the call price.
D) The bondholders will immediately convert their bonds to share.

Question 7

When convertible bonds are first issued
B) II and IV only.
C) II and III only.
D) I and IV only.
E) I and III only.

Question 8

Which of the following is a good reason to invest in convertible bonds?

A) They tend to be issued by stable, low- risk companies.
B) They offer predictable income and a chance to profit from an increase in the share price.
C) They often have higher than normal coupon rates.
D) They offer protection against rising interest rates.

Question 9

Bob expects to retire in a few years and his primary goal is to avoid major losses. Which of the following bond characteristics should he be seeking?
B) I and III only.
C) I, III, and III only.
C) II and IV only.
D) II, III, and IV only.

Question 10

Most bonds pay interest

A) semi- annually.
B) monthly.
C) quarterly.
D) annually.

Question 11

A type of bond that is issued and traded outside the United States and which is denominated in U.S. dollars but is not registered with the SEC is

A) an issue of the World Bank.
B) a Yankee bond.
C) an issue of the InterAmerican Bank.
D) a Eurodollar bond.

Question 12

Treasury strip bonds are popular because
B) I, II and IV only.
B) I, II, III and IV.
C) I and III only.
D) I, II and III only.

Question 13

If you expect market interest rates to rise, you should purchase

A) long term, low coupon bonds.
B) short term, low coupon bonds.
C) short term, high coupon bonds.
D) long term, high coupon bonds.

Question 14

Which one of the following is the most junior in terms of its claim on earnings and assets?

A) Equipment trust certificate.
B) Collateral trust bond.
C) Subordinated debenture.
D) Mortgage bond.

Question 15

In a severe recession, the major source of risk faced by investors who purchase corporate bonds is

A) interest rate risk.
B) purchasing power risk.
C) liquidity risk.
D) default risk.

Question 16

The practice of bundling mortgages or other loans into pools and selling shares of the pool as bond- like instruments is known as

A) privatisation.
B) fractionalisation.
C) collateralisation.
D) securitisation.

Question 17

The bond market is considered bearish when

A) more bonds are called than issued over a given period of time.
B) market interest rates are low or falling.
C) the risk- free rate of return exceeds the required rate of return.
D) market interest rates are high or rising.

Question 18

Which one of the following statements concerning a global view of the bond market is correct?

A) U.S. pay bonds distribute both interest and principal payments in euros.
B) Exchange rate fluctuations influence the returns earned on foreign- pay bond holdings.
C) Foreign bonds, like junk bonds, have high default risk.
D) The United States today accounts for about seventy- five percent of the available fixed- income securities worldwide.

Question 19

If a bond rating moves from a BB to a BBB rating

A) it must also move from a Ba to a Baa rating.
B) the market yield on the bond will rise.
C) the market price of the bond will rise.
D) the bond will still be classified as junk.

Question 20

Pass- through securities backed by pools of auto loans, credit card bills, and computer leases are known as

A) Treasury bonds.
B) PIK bonds.
C) ABSs.
D) Fannie Maes.

Question 21

When the market rate of return exceeds the coupon rate, a bond will sell at

A) a premium.
B) a discount.
C) face value.
D) par.

Question 22

Under normal economic conditions, the major source of risk faced by investors who purchase investment grade bonds is

A) default risk.
B) liquidity risk.
C) interest rate risk.
D) purchasing power risk.

Question 23

An increase in the market rate of return on an outstanding bond will

A) increase the coupon rate.
B) decrease the bond price.
C) decrease the coupon rate.
D) increase the bond price.

Question 24

Which of the following is(are) senior bonds?
B) I, II and IV only.
C) I and II only.
D) III only.
F) II and IV only.

Question 25

The denomination of most corporate bonds is and the maturities generally range from .

A) $1,000; 3 to 10 years
B) $100,000; 3 to 10 years
C) $1,000; 20 to 40 years
D) $100,000; 20 to 40 years

Question 26

Which one of the following statements correctly describes the major drawback of a zero- coupon bond?

A) The lack of an annual coupon basically prohibits the investor from locking in a high rate of return.
B) The conversion feature found on most zero- coupon bonds generally requires the investor to switch to a coupon- bearing bond after a period of 5 years.
C) Because there is no reinvestment of a coupon payment, large capital losses accrue when interest rates decline.
D) Unless the bond is held in a tax- sheltered account, the investor must pay taxes on the annual accrued interest even though no interest is actually received.

Question 27

Eurodollar bonds are

A) purchased and redeemed in dollars but issued by entities outside the U.S.A.
B) purchased with dollars, but redeemable in either euros or dollars.
C) purchased with dollars but redeemed in euros.
D) purchased with dollars but redeemed in euros.

Question 28

Lee is considering buying one of two newly- issued bonds. Bond A is a twenty- year, 7.5% coupon bond that is non- callable. Bond B is a twenty- year, 8.25% bond that is callable after two years. Both bonds are comparable in all other aspects. Lee plans on holding his bond to maturity. What should Lee do if he feels that interest rates are going to decline by 2% in the near future and then remain relatively stable thereafter?

A) Purchase Bond A.
B) Purchase neither A nor B at this time.
C) Negotiate a higher rate on Bond A.
D) Purchase Bond B.

Question 29

Which one of the following variables has the greatest effect on bond prices?

A) Share market returns.
B) Economic growth.
C) Inflation.
D) Interest rates.

Question 30

The phenomenon known as "flight to quality" causes yields on government bonds and corporate bonds

A) to fall in tandem.
B) to become less volatile.
C) to move in opposite directions.
D) to rise in tandem.

Question 31

When the economy is moving toward a recession, the yield on riskier bonds will tend to

A) fall.
B) rise.
C) become volatile.
D) stagnate.

Question 32

Which of the following statements about U.S. Treasury bonds are true? I) II and III only.
B) I, II and IV only.
C) I and IV only.
D) I, III and IV only.

Question 33

Which of the following statements are correct concerning Eurodollar bonds? H) II and III only.
B) II, III and IV only.
C) I, II and IV only.
D) I and IV only.

Question 34

Which of the following will tend to improve a bond's rating?
B) I, II, III and IV.
C) I, III and IV only.
D) II, III and IV only.
G) I, II and III only.

Question 35

Bonds with one of the top four ratings (Aaa through Baa, or AAA through BBB) are designated as

A) split bonds.
B) high- yield bonds.
C) illiquid bonds.
D) investment grade bonds.

Question 36

The Franklin Company issued a 6% bond three years ago at par value. The market interest rate on comparable bonds today is 5%. The Franklin Company bond currently pays a year in interest and the bond sells at a .

A) $60; premium
B) $50; discount
C) $60; discount
D) $50; premium

Question 37

A single bond issue with multiple maturity dates is called a

A) serial bond.
B) term bond.
C) callable bond.
D) premium bond.

Question 38

Which type of risk is based on the financial integrity of a bond issuer?

A) Business risk.
B) Interest rate risk.
C) Liquidity risk.
D) Call risk.

Question 39

At the time you purchase a bond, you know the exact holding period return you will earn if

A) the bond is called at any time prior to maturity.
B) the market rate of interest declines within the next year.
C) you resell the bond in exactly one year from the date of purchase.
D) you hold the bond to maturity.

Question 40

When bonds are initially added to an all- equity portfolio the

A) rate of return is not impacted but the level of risk is lowered.
B) rate of return on the portfolio is impacted more than the level of risk.
C) level of risk and the rate of return are equally impacted.
D) level of risk of the portfolio is impacted more than the rate of return.

Question 41

A bond which has a deferred call

A) can be retired at any time prior to maturity provided six months notice is given.
B) cannot be retired for a specific period of time after which it can be retired at any time.
C) can be retired at any time during the initial call period but after that time cannot be redeemed prior to maturity.
D) does not have to be redeemed when it reaches maturity.

Question 42

Interest rates and bond prices are directly related.

Question 43

One of the major problems associated with mortgage- backed securities is that

A) they are serial issues.
B) they are self- liquidating.
C) they are refundable.
D) the principal portion of each payment is considered taxable income.

Question 44

If you feel interest rates are going to drop significantly, you could potentially realise large capital gains by purchasing long- term zero-coupon bonds prior to the rates decreasing.

Question 45

One type of foreign bond that carries no currency exchange rate risk for a U.S. investor is a

A) Yankee bond.
B) Eurodollar bond.
C) PIK bond.
D) foreign- pay bond.

Question 46

The par value of a Treasury inflation- indexed obligation is established as $1,000 over the life of the bond.

Question 47

Yankee bonds are issued by the U.S. government, but sold only to foreign investors.

Question 48

When interest rates change, the prices of short- term bonds will change more than those of long- term bonds.

Question 49

One disadvantage of mortgage-backed securities is their uncertain maturity date.

Question 50

Which of the following statements are correct in respect to high- yield bonds? J) I and III only.
B) I, II, III and IV.
C) I, II and III only.
D) II, III and IV only.

Question 51

Mortgage- backed securities are self- liquidating.

Question 52

Which of the following factors are included in the rating analysis of a corporate bond? L) I, II, III and IV.
B) I, II and III only.
C) I and II only.
D) II, III and IV only.

Question 53

Bond prices are stable over any five- to ten- year period.

Question 54

Which one of the following combination of features causes bond prices to be the most volatile?

A) Low coupon, long maturity.
B) High coupon, long maturity.
C) Low coupon, short maturity.
D) High coupon, short maturity.

Question 55

Zero- coupon bonds have very limited price volatility.

Question 56

Which of the following are advantages of owning bonds? K) I, II, III and IV.
B) I, II and III only.
C) I and II only.
D) I, III and IV only.

Question 57

An increase in the market rate of interest can cause a bondholder to realise a capital loss on the sale of their bonds.

Question 58

PIK- bonds

A) are relatively safe investments.
B) are collateralised by home mortgages.
C) pay monthly interest payments.
D) initially pay interest payments in the form of additional debt.

Question 59

If you want to reduce the price volatility of your bond portfolio, you should shorten the time- to- maturity of your portfolio.

Question 60

Fixed coupon rates cause bond yields to lag inflation rates when inflation rates begin to increase significantly.

Question 61

Convertible bonds are especially attractive when share prices are falling.

Question 62

In an inflationary environment, the interest payments on Treasury inflation- indexed obligations increase over time.

Question 63

From 1986 through 2005, the bond market outperformed the share market by a slim margin.

Question 64

As investors approach retirement age, they should hold more bonds and less shares.

Question 65

The biggest risk with foreign bonds is the risk of default.

Question 66

If the inflation rate is 2%, the principal of a Treasury inflation protection security will rise from
$1,000 to $1,020.

Question 67

An American investor who holds euro- denominated bonds will profit if the euro weakens against the dollar.

Question 68

When a bond is called, the bondholder generally faces a rate of return that is lower than expected.

Question 69

When the call price of a convertible bond share exceeds the conversion value of the bond, the issuing company is likely to force conversion by calling the bonds.

Question 70

The initial call price of an 8% bond could be as high as $1,080.

Question 71

The risk premium component of a bond's market interest rate is related to the characteristics of the particular bond and its issuer.

Question 72

Each interest payment on a 6%, semi- annual bond is $60.

Question 73

Bonds are typically a good investment choice for an individual who is seeking long- term preservation of capital.

Question 74

Most bonds pay interest quarterly.

Question 75

If you hold a zero- coupon bond to maturity, the fully compounded rate of return is virtually guaranteed to be equal to the rate stated at the time the bond was purchased.

Question 76

Mortgage- backed bonds are issued primarily by state governments and are secured by home mortgages.

Question 77

Junk bond prices tend to be volatile just like common stock prices.

Question 78

Investment- grade bonds are more interest rate sensitive than junk bonds.

Question 79

Bondholders can earn income both from interest and from capital gains.

Question 80

The coupon rate on convertible bonds is usually higher than the coupon rate on equivalent bonds that are not convertible.