Deck 17: Bond Fundamentals

Question 1

Most U.S. municipal bonds are serial issues which are subject to state and local taxes when they are issued in the investor's home state.

Answer 1

False

Question 2

A bond's maturity is affected by: call features, non-refunding provisions, and sinking fund provisions.

Answer 2

True

Question 3

Bonds can have different types of collateral and can be either secured, unsecured or registered bonds.

Answer 3

False

Question 4

A nonrefunding provision prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon refunding bond.

Question 5

Government bond issues require an annual sinking fund payment of not less than one percent of the outstanding issue.

Question 6

Bonds rated BB or above are considered to be investment grade bonds.

Question 7

Wealthy individual investors typically account for 90 to 95 percent of investors in the bond market.

Question 8

In the case of a bond, the only contractual factor is the amount of interest payments, since beginning and ending bond prices are determined by market forces.

Question 9

In Germany, the government sector is the largest bond market segment.

Question 10

Samurai bonds are yen-denominated bonds sold in markets outside Japan by international syndicates.

Question 11

High-yield bonds are considered "investment" grade.

Question 12

The secondary bond market is significantly more active than the stock market.

Question 13

Public bonds differ from other debt because they are sold to the public rather than to a single investor.

Question 14

As of 2008, approximately 80% of all new municipal bond issues are insured.

Question 15

The coupon of a bond indicates the income that the bond investor will receive over the life of the bond.

Question 16

The yield to maturity is normally equal to the coupon rate.

Question 17

Treasury Inflation Protected Securities (TIPS) ensures that investors will received the promised yield in real terms by indexing bond principal and interest payments to the stock market.

Question 18

High-yield bonds are considered "investment" grade.

Question 19

The bond market segments that tend to be highly correlated and move together include

A)Short and long term bonds.
B)Short and intermediate term bonds.
C)Intermediate and long term bonds.
D)Short, intermediate and long term bonds.
E)None of the above.

Question 20

A bond's price is determined by the issue's coupon rate, length to maturity, and the prevailing yield in the market.

Question 21

Institutional investors typically account for about

A)90 to 95 percent of bond market trading.
B)40 to 50 percent of bond market trading.
C)10 to 15 percent of bond market trading.
D)Less than 5% of bond market trading.
E)None of the above.

Question 22

Serial bonds

A)Can be callable.
B)Can have sinking funds.
C)Have different maturity dates.
D)All of the above.
E)None of the above.

Question 23

TIPS are U.S Treasury securities where the coupon rate is

A)Zero
B)Indexed to the rate of inflation.
C)Indexed to the discount rate.
D)Indexed to the prime rate.
E)None of the above.

Question 24

A security that has a coupon that is periodically adjusted is a(n)

A)Variable note.
B)Variation note.
C)Adjustable coupon note.
D)Money market certificate.
E)Deep discount bond.

Question 25

Which set of conditions will result in a bond with the greatest volatility?

A)A high coupon and a short maturity
B)A high coupon and a long maturity
C)A low coupon and a short maturity
D)A low coupon and a long maturity
E)A deferred call feature and a sinking fund.

Question 26

The annual interest paid on a bond relative to its prevailing market price is called its

A)Promised yield.
B)Yield to maturity.
C)Coupon rate.
D)Effective yield.
E)Current yield.

Question 27

The major owners of high-yield bonds have been

A)Commercial banks.
B)Savings and loans.
C)Mutual funds.
D)California Credit Unions (CCU's).
E)European banks.

Question 28

Bond ratings are positively related to

A)Leverage.
B)Size.
C)Type of business.
D)All of the above.
E)None of the above.

Question 29

Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate?

A)A call provision
B)No restrictive covenants
C)A sinking fund provision
D)Change in bond rating from Aaa to Aa
E)None of the above (that is, all will increase the coupon rate)

Question 30

When a fixed income security is being traded at the price above its face value it is trading

A)At a discount.
B)At par.
C)At a premium.
D)Flat.
E)No accrual.

Question 31

When a bond issue is secured by a legal claim on equipment it is known as a(n)

A)Junior bond.
B)Income bond.
C)Bearer bond.
D)Trust certificate.
E)Perpetuity.

Question 32

Which type of bond is backed by the full faith and credit of the issuer and its entire taxing power?

A)Fannie Mae
B)Freddie Mac
C)GSEs
D)General obligation
E)Revenue

Question 33

Which of the following statements is not true regarding bond ratings?

A)The ratings assigned are meant to indicate the probability of default for the bond issuer.
B)The bonds assigned one of the top four rating classes are considered investment grade bonds.
C)Once a rating is assigned to an issue it cannot be changed for the first two years after which it is reviewed on a regular basis.
D)Bonds rated BB and below are referred to as high yield or "junk" bonds.
E)The rating agencies modify the ratings with + and -signs or numbers after the letters.

Question 34

Treasury bonds which can be purchased at a discount to be used at par to pay estate taxes are called

A)Estate bonds.
B)Flower bonds.
C)Municipal bonds.
D)Probate bonds.
E)Survivor bonds.

Question 35

The bonds issued by the Bank of England are known as

A)Gilts.
B)Bunds.
C)Limies.
D)Treasuries.
E)Benchmarks.

Question 36

When a fixed income security is being traded but the issuer is not meeting interest payments it is trading

A)Stamped.
B)Registered.
C)Flat.
D)Round.
E)No accrual.

Question 37

The refunding provision of an indenture allows bonds to be retired unless

A)They are replaced with a lower coupon bond issue.
B)The remaining time to maturity is less than five years.
C)The remaining time to maturity is greater than five years.
D)The stated time period in the indenture has not passed.
E)The stated time period in the indenture has passed.

Question 38

Which of the following is not a major rating agency for bonds?

A)Moody's
B)Standard & Poor's
C)Fitch Investor Services
D)Value Line
E)Duff and Phelps

Question 39

Bond ratings are negatively related to

A)Profitability.
B)Cash flow coverage.
C)Earnings instability.
D)All of the above.
E)None of the above.

Question 40

The institutions which invest most heavily in corporate bond issues are

A)Life insurance companies and commercial banks.
B)Life insurance companies and property and liability insurance companies.
C)Life insurance companies and pension funds.
D)Commercial banks and property and liability insurance companies.
E)Commercial banks and pension funds.

Question 41

Collateralized Mortgage obligations are

A)Mortgage pass-through securities.
B)Mortgage pass-through securities with varying maturities.
C)Mortgage pass-through securities with no default risk.
D)Mortgage pass-through securities with variable coupon rates.
E)None of the above.

Question 42

A bond that only pays a principal payment at maturity date is known as a(n):

A)Blank bond.
B)Maturity bond.
C)Interest free bond.
D)Mini-coupon bond.
E)Zero coupon bond.

Question 43

Which type of bond market is the largest sector in both Japan and the United States?

A)Corporate
B)High Yield/Emerging Market
C)Securitized/Collaterallized
D)Sovereign
E)Quasi & Foreign Governments

Question 44

A U.S. dollar-denominated bond sold in the United States by a Japanese-firm is called a(n):

A)Yankee bond.
B)Homeland bond.
C)International bond.
D)U.S. Domestic bond.
E)Japanese U.S. Regional bond.

Question 45

Which bond provision would be considered the most risky for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?

A)Sinking fund
B)Deferred call
C)Freely callable
D)Non-callable
E)None of the above

Question 46

What was developed in the early 1980s to offset some of the problems with traditional mortgage pass-throughs?

A)Variable rate mortgages.
B)Collateralized mortgage obligations (CMOs)
C)Leveraged buyouts (LBOs)
D)Deep discount bonds (DDBs)
E)High yield bonds.

Question 47

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

A)Samurai bond.
B)Eurobond.
C)Yankee bond.
D)Euroyen bond
E)Foreign bond.

Question 48

The legal document setting forth the obligations of a bond's issuer is called

A)A debenture.
B)A warrant.
C)An indenture.
D)A rights certificate.
E)A trustee deed.

Question 49

Issues that provide funds to retire another issue early are known as

A)Bearer bonds
B)Secured debentures
C)Unsecured debentures
D)Revenue bonds
E)Refunding bonds

Question 50

When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively

A)Make the maturities of GNMA securities longer.
B)Make the maturities of GNMA securities shorter.
C)Make the maturities of U.S. Treasury securities longer.
D)Make the maturities of U.S. Treasury securities shorter.
E)None of the above.

Question 51

Which of the following entities acquire mortgages and create mortgage backed securities?

A)Federal National Mortgage Association (Fannie Mae)
B)Government National Mortgage Association (Ginnie Mae)
C)Federal Home Loan Mortgage Corporation (Freddie Mac)
D)All of the above.
E)None of the above.

Question 52

Revenue bonds are

A)U.S. Treasury bonds backed by the full faith and credit of the issuer.
B)U.S. Treasury bonds backed by income generated form specific projects.
C)Municipal bonds backed by the full faith and credit of the issuer.
D)Municipal bonds backed by income generated from specific projects.
E)A type of U.S. agency security.

Question 53

The face value of a U.S. government agency security

A)Is always $1000.
B)Ranges from $1000 to $5000.
C)Ranges from $1000 to $100,000.
D)Ranges from $1000 to $50,000.
E)Is always $10,000.

Question 54

If the yield to maturity for a par value TIPS bond with 8 years to maturity is 3%, and the yield to maturity of a U.S Treasury note with 8 years is 4.25%, this implies that

A)The expected annual rate of inflation over the next 8 years is-1.25%.
B)The expected annual rate of inflation over the next 8 years is 1.25%.
C)The expected annual rate of inflation over the next 8 years is -2.25%
D)The expected annual rate of inflation over the next 8 years is 2.25%
E)None of the above.

Question 55

A 6.5 percent coupon bond issued by the State of California sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 26 percent marginal tax bracket?

A)1.69%
B)11.25%
C)8.78%
D)14.63%
E)25%

Question 56

When a borrower pledges financial assets as collateral for a bond it is called a(n)

A)Mortgage bond.
B)Equipment trust certificate.
C)Mortgage pass-through security.
D)Collateral trust bond.
E)Collateralized mortgage obligation (CMO).

Question 57

Which of the following statements regarding Collateralized Debt Obligations (CDOs) is false?

A)CDOs experienced rapid growth since the year 2000.
B)The assets used to back the CDOs are substantially diverse.
C)The credit quality within a CDO at the time of issue is diverse.
D)CDOs have generated significant credit and liquidity problems.
E)All of the above statements are true.

Question 58

Collateralized mortgage obligations (CMOs) offset some of the problems associated with traditional mortgage pass-throughs because

A)They are overcollateralized.
B)They have variable rates.
C)Collateralized by auto-loans.
D)They are deep discount instruments.
E)Collateralized by credit card debt.

Question 59

General obligation bonds are

A)U.S. Treasury bonds backed by the full faith and credit of the issuer.
B)U.S. Treasury bonds backed by income generated form specific projects.
C)Municipal bonds backed by the full faith and credit of the issuer.
D)Municipal bonds backed by income generated from specific projects.
E)A type of U.S. agency security.

Question 60

A 4.75 percent coupon bond issued by the State of Washington sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 28 percent marginal tax bracket?

A)1.1%
B)5.8%
C)6.6%
D)7.3%
E)9.7%

Question 61

Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c c c c c c c c } \text { Company } & \text { Ticker } & \text { Coupon } & \text { Maturity } & \begin{array} { c } \text { Last } \\\text { Price }\end{array} & \begin{array} { c } \text { Last } \\\text { Yiel }\end{array} & \begin{array} { c } \text { EST } \\\text { Spread }\end{array} & \text { UST } & \begin{array} { c } \text { Est } \$ \text { Vol } \\( 000 \text { s) }\end{array} \\\hline \text { Gen Elec } & \text { GE } & 4.75 & 9 / 15 / 2019 & 99.544 & 4.808 & 62 & 10 & 158736\end{array}$$

-Refer to Exhibit 17.1. What annual dollar coupon amount will investors receive?

A)$4.75
B)$47.50
C)$4.808
D)$48.08
E)$62

Question 62

An 8.5 percent coupon bond issued by the State of Ohio sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 25 percent marginal tax bracket?

A)2.13%
B)12.25%
C)11.33%
D)13.53%
E)34.71%

Question 63

Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c c c c c c c c } \text { Company } & \text { Ticker } & \text { Coupon } & \text { Maturity } & \begin{array} { c } \text { Last } \\\text { Price }\end{array} & \begin{array} { c } \text { Last } \\\text { Yiel }\end{array} & \begin{array} { c } \text { EST } \\\text { Spread }\end{array} & \text { UST } & \begin{array} { c } \text { Est } \$ \text { Vol } \\( 000 \text { s) }\end{array} \\\hline \text { Gen Elec } & \text { GE } & 4.75 & 9 / 15 / 2019 & 99.544 & 4.808 & 62 & 10 & 158736\end{array}$$

-Refer to Exhibit 17.1. What is the estimated yield on Treasury securities?

A)4.188%
B)5.428%
C)5.371%
D)4.132%
E)4.753%

Question 64

For bonds A and B below find the values of X and Y assuming each is a zero coupon bond with a $1,000 face value (semiannual compounding). $$\begin{array} { c c c c } \text { Bond } & \begin{array} { c } \text { Maturity } \\\text { (Years) }\end{array} & \begin{array} { c } \text { Yield } \\\text { (Percent) }\end{array} & \begin{array} { c } \text { Price } \\( \$ \$ )\end{array} \\\hline \text { A } & X & 10 & 458.10 \\\text { B } & 9 & Y & 212.00\end{array}$$

A)8 years and 4 percent
B)10 years and 8 percent
C)12 years and 10 percent
D)14 years and 12 percent
E)8 years and 18 percent

Question 65

At what point would an investor be indifferent between a Drifton corporate bond yielding 12.5 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

A)6.05%
B)7.10%
C)8.15%
D)9.38%
E)16.27%

Question 66

Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c c c c c c c c } \text { Company } & \text { Ticker } & \text { Coupon } & \text { Maturity } & \begin{array} { c } \text { Last } \\\text { Price }\end{array} & \begin{array} { c } \text { Last } \\\text { Yiel }\end{array} & \begin{array} { c } \text { EST } \\\text { Spread }\end{array} & \text { UST } & \begin{array} { c } \text { Est } \$ \text { Vol } \\( 000 \text { s) }\end{array} \\\hline \text { Gen Elec } & \text { GE } & 4.75 & 9 / 15 / 2019 & 99.544 & 4.808 & 62 & 10 & 158736\end{array}$$

-Refer to Exhibit 17.1. What is the capital gains/loss yield on this bond?

A)-0.038%
B)0.456%
C)0.038%
D)-0.456%
E)None of the above

Question 67

Calculate the yield to maturity of a zero coupon bond with a face value of $1000, maturing in 10 years and selling for a price of $529.30.

A)6.57%
B)8.45%
C)4.16%
D)10.23%
E)12.17%

Question 68

Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c c c c c c c c } \text { Company } & \text { Ticker } & \text { Coupon } & \text { Maturity } & \begin{array} { c } \text { Last } \\\text { Price }\end{array} & \begin{array} { c } \text { Last } \\\text { Yiel }\end{array} & \begin{array} { c } \text { EST } \\\text { Spread }\end{array} & \text { UST } & \begin{array} { c } \text { Est } \$ \text { Vol } \\( 000 \text { s) }\end{array} \\\hline \text { Gen Elec } & \text { GE } & 4.75 & 9 / 15 / 2019 & 99.544 & 4.808 & 62 & 10 & 158736\end{array}$$

-Refer to Exhibit 17.1. What price would you pay in dollars to purchase this bond?

A)$62
B)$9.954
C)$48.08
D)$99.544
E)$995.44

Question 69

At what point would an investor be indifferent between a Bridgford corporate bond yielding 8.0 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

A)5.00%
B)7.10%
C)8.00%
D)9.15%
E)6.00%

Question 70

How much would you expect to pay for a $10,000 Treasury note quoted at 96:27?

A)$9,627.00
B)$10,000.00
C)$968.44
D)$9,684.38
E)None of the above

Question 71

You purchase a 8 1/2s February $10,000 par Treasury Note at 105:16 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 105:16?

A)8.00%
B)8.06%
C)8.22%
D)8.50%
E)8.47%

Question 72

A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after tax return to the investor as the municipal bond if the investor is in the 29 percent marginal tax bracket?

A)7.59%
B)12.25%
C)9.86%
D)14.63%
E)30.71%

Question 73

Exhibit 17.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c c c c c c c c } \text { Company } & \text { Ticker } & \text { Coupon } & \text { Maturity } & \begin{array} { c } \text { Last } \\\text { Price }\end{array} & \begin{array} { c } \text { Last } \\\text { Yiel }\end{array} & \begin{array} { c } \text { EST } \\\text { Spread }\end{array} & \text { UST } & \begin{array} { c } \text { Est } \$ \text { Vol } \\( 000 \text { s) }\end{array} \\\hline \text { Gen Elec } & \text { GE } & 4.75 & 9 / 15 / 2019 & 99.544 & 4.808 & 62 & 10 & 158736\end{array}$$

-Refer to Exhibit 17.1. What is the current yield for this bond?

A)4.18%
B)5.88%
C)4.77%
D)8.125%
E)4.063%

Question 74

You purchase a 9 3/4s February $10,000 par Treasury Note at 101:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:17?

A)8.14%
B)8.75%
C)9.75%
D)9.81%
E)10.47%

Question 75

You purchase a 10 1/4s February $10,000 par Treasury Note at 102:15 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 104:14?

A)11.92%
B)8.16%
C)8.55%
D)8.61%
E)10.25%

Question 76

You purchase a 11 3/8s February $10,000 par Treasury Note at 103:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 100:13?

A)10.14%
B)11.75%
C)8.22%
D)8.32%
E)8.16%

Question 77

How much would you expect to pay for a $10,000 stripped Treasury bond quoted at 101:16?

A)$10,150.00
B)$10,000.00
C)$101.16
D)$10,160.00
E)None of the above

Question 78

At what point would an investor be indifferent between a Compco corporate bond yielding 8.5 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

A)6.05%
B)7.10%
C)8.15%
D)6.38%
E)2.34%

Question 79

At what point would an investor be indifferent between a Trifton corporate bond yielding 12.0 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

A)6.00%
B)7.10%
C)9.00%
D)9.15%
E)14.00%

Question 80

You purchase a 10 3/8s February $10,000 par Treasury Note at 103:11 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 101:13?

A)8.14%
B)8.16%
C)8.22%
D)8.32%
E)8.47%