Deck 16: Investing in Bonds

Question 1

Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature.

Answer 1

True

Question 2

Generally, bonds have maturities between 10 and 30 years and pay interest annually.

Answer 2

False

Question 3

Bonds are equity investments issued by corporations or government agencies.

Answer 3

False

Question 4

During their lifetime, bonds can be sold for more or less than their face value depending on the market interest rates.

Question 5

Because convertibility is a desirable feature for investors, convertible bonds tend to offer a higher return than nonconvertible bonds.

Question 6

A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.

Question 7

The ________ is the amount returned to the investor at the maturity date when the bond is due.

A) principal
B) interest gain
C) capital gain
D) terminal value

Question 8

Bonds are issued with a callable feature when the issuers expect interest rates to rise.

Question 9

All of the following may be a feature of a bond, except

A) they can be convertible.
B) they pay dividends.
C) they can be tax-free.
D) they can be callable.

Question 10

You should consider investing in bonds rather than stock if you

A) are willing to take more risk.
B) wish to receive income from your investment.
C) are willing to tie up your investment for a long period.
D) think interest rates will increase significantly in the near future.

Question 11

When a bond has a par or face value of $1,000 and a 6% coupon rate, the semiannual payment would be $60.

Question 12

Bonds usually pay interest

A) annually.
B) semiannually.
C) quarterly.
D) monthly.

Question 13

An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity.

Question 14

If you want to receive periodic income from your investments, you should consider investing in bonds rather than stocks.

Question 15

A bond's par value or face value is the amount the investor will get paid when the bond matures.

Question 16

A call feature on bonds allows the issuer to buy back the bonds from investors before the maturity date.

Question 17

Which of the following is not a reason investors purchase bonds?

A) Conservative investment
B) Pay periodic income
C) May be convertible
D) Guaranteed return of principal

Question 18

Investors purchase corporate bonds because

A) they are a risk-free investment.
B) they pay interest income.
C) they pay dividends.
D) the returns are higher than the returns from stocks.

Question 19

Which of the following is not always a true statement?

A) The par value of a bond is its face value.
B) The par value of a bond is its market value.
C) The par value of a bond will be paid to the bondholder at maturity.
D) The par value multiplied by the coupon rate equals the interest paid to investors annually.

Question 20

A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured.

Question 21

Convertible bonds tend to offer a(n) ________ return than nonconvertible bonds.

A) higher
B) lower
C) similar
D) indexed

Question 22

Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?

A) Par value
B) Call feature
C) Convertibility
D) Yield to maturity

Question 23

If a bond's price is lower than the principal amount, its yield to maturity will be ________ the coupon rate.

A) less than
B) more than
C) equal to
D) unrelated to

Question 24

What is the semiannual interest payment on a $1,000 bond with a 7% coupon rate?

A) $70
B) $35
C) $350
D) $700

Question 25

Bonds that may be exchanged for common stock when the stock reaches a specified price are called

A) options.
B) convertible bonds.
C) callable bonds.
D) stock bonds.

Question 26

Investing in bonds gives you the possibility of all of the following, except

A) having a capital gain.
B) losing your investment if the company goes bankrupt.
C) receiving dividends.
D) receiving the face value at maturity.

Question 27

Callable bonds are issued when interest rates are expected to

A) stay the same.
B) decline.
C) rise.
D) None of the above.

Question 28

If a company's stock price is expected to increase substantially over the next few years, which of the following may entice potential bondholders to accept a lower coupon rate on the company's bonds?

A) Par value
B) Call feature
C) Convertibility
D) Reserve feature

Question 29

Investors are willing to purchase bonds with a call feature only if the bonds offer a(n)

A) slightly lower return than similar bonds without a call feature.
B) slightly higher number of shares of the issuer's stock.
C) slightly higher return than similar bonds without a call feature.
D) extraordinary return similar to an IPO.

Question 30

The coupon rate of interest on a bond is always stated as a(n)

A) daily rate.
B) monthly rate.
C) semiannual rate.
D) annual rate.

Question 31

A ________ feature on a bond allows the issuer to buy back the bond from the investor before maturity.

A) convertible
B) dividend
C) call
D) recall

Question 32

The return on bonds currently held will be more favorable if interest rates ________ over the period you hold the bonds.

A) increase
B) decrease
C) fluctuate
D) remain the same

Question 33

If a bond pays $50 interest semiannually with a par value of $1,000, its coupon rate is

A) 5%.
B) 10%.
C) 15%.
D) 20%.

Question 34

If a company anticipates a substantial decline in interest rates in the future, which of the following is it likely to include in a bond?

A) Par value
B) Call feature
C) Convertibility
D) Reverse dividend

Question 35

The ________ is the stated interest rate of the bond at the time it was issued.

A) effective rate
B) yield
C) coupon rate
D) IRR

Question 36

If a bond can be exchanged for common stock if the stock reaches a specified price, the bond is a(n) ________.

Question 37

The current yield on a $1,000 par value bond worth $900 and a coupon rate of 10% is

A) 12.05%.
B) 9%.
C) 10%.
D) 11.11%.

Question 38

Another name for the par value of a bond is its ________.

Question 39

On the secondary bond market,

A) only new bonds can be sold.
B) bonds are guaranteed to bring at least par value.
C) bond prices vary with interest rate movement and other factors.
D) bonds usually take several days to sell.

Question 40

If a bond's value rises above its face value during its life, interest rates have

A) increased.
B) decreased.
C) stayed the same.
D) There is no relationship between bond prices and interest rates.

Question 41

Municipal bonds are those issued by the U.S. Treasury Department for the benefit of cities and states.

Question 42

Which of the following is not a characteristic of Treasury bonds?

A) Long-term debt securities
B) Issued by the U.S. Treasury
C) Exempt from federal tax
D) Highly liquid

Question 43

Junk bonds offer a relatively high rate of return, but they are more likely to default than other bonds.

Question 44

Federal agency bonds are all of the following, except they

A) are issued by government agencies or government-sponsored entities.
B) have a very low degree of default risk.
C) are issued by Ginnie Mae, Freddie Mac, and Fannie Mae.
D) are exempt from all taxation.

Question 45

You own a $1,000 par value convertible bond with a 6% coupon rate. The bond is convertible into 20 shares of stock at the investor's discretion. The stock price has reached $51 per share with a $1 per share annual dividend, but you do not forecast any further price appreciation in the stock. Should you make the conversion?

A) No, 20 shares of stock are not worth $1,000.
B) Yes, since the stock is worth $51 per share it is worth more than the bond.
C) No, the total stock is only worth $20 more than the bond, and you would lose $40 in annual cash flow based on the coupon rate versus the dividend.
D) Yes, while the stock is only worth $20 more in total than the bond, you will receive an annual $1 per share dividend.

Question 46

Municipal bonds tend to have a ________ coupon rate than Treasury bonds issued at the same time; however, municipal bonds usually offer a(n) ________ after-tax return to investors.

A) higher; lower
B) lower; higher
C) higher; higher
D) lower; equal

Question 47

The advantage of a convertible bond to the investor is

A) higher coupon interest rates.
B) ability to "own the upside" if the company performs well.
C) convertibility protects the investor if the stock decreases in value.
D) None of these are advantages.

Question 48

Which of the following statements is not true regarding municipal bonds?

A) They are issued by state and local governments.
B) They are free from the risk of default.
C) The interest is exempt from federal income taxes.
D) The interest is exempt from state taxes if the investor resides in the state where the bond was issued.

Question 49

If a par value $1,000 bond is convertible into 20 shares of the company's stock at the discretion of the investor, what must the market price of the stock be in order for the investor to make the conversion?

A) $1,000
B) $49.50
C) $50.01
D) $50

Question 50

Since municipal bond interest is exempt from federal income tax, it is especially beneficial to high-income investors.

Question 51

Use the following two columns of items to answer the matching questions below:
convertible bonds

A)annualized return on a bond if held to maturity
B)par value or the amount returned to the investor at maturity
C)bonds that can be converted into stock
D)long-term securities issued by government agencies or corporations

Question 52

A bond from Ginnie Mae is an example of a bond issued by

A) a corporation.
B) the U.S. Treasury.
C) a municipality.
D) an agency of the federal government.

Question 53

The interest received from U.S. Treasury bonds is exempt from federal, state, and local income taxes.

Question 54

Municipal bonds are most beneficial for investors who

A) reside in a different state from the municipality that issued the bonds.
B) are in a low tax bracket.
C) are in a high tax bracket.
D) qualify for the earned income credit.

Question 55

Use the following two columns of items to answer the matching questions below:
face value

A)annualized return on a bond if held to maturity
B)par value or the amount returned to the investor at maturity
C)bonds that can be converted into stock
D)long-term securities issued by government agencies or corporations

Question 56

________ bonds are the least risky of all bonds and, therefore, pay a lower rate of interest.

A) Treasury
B) Municipal
C) Federal agency
D) Corporate

Question 57

Use the following two columns of items to answer the matching questions below:
yield to maturity

A)annualized return on a bond if held to maturity
B)par value or the amount returned to the investor at maturity
C)bonds that can be converted into stock
D)long-term securities issued by government agencies or corporations

Question 58

Use the following two columns of items to answer the matching questions below:
bonds

A)annualized return on a bond if held to maturity
B)par value or the amount returned to the investor at maturity
C)bonds that can be converted into stock
D)long-term securities issued by government agencies or corporations

Question 59

Some ________ bonds are called junk bonds, which have a high level of risk.

A) Treasury
B) Municipal
C) Federal Agency
D) Corporate

Question 60

________ bonds are issued by state and local government agencies.

A) Treasury
B) Municipal
C) Federal agency
D) Corporate

Question 61

Which of the following tax implications will result from selling your bonds at a lower price than what you paid for them eight months ago?

A) You have a short-term capital gain taxed at your ordinary income tax rate.
B) You have a long-term capital gain subject to capital gains tax.
C) You have a long-term capital loss.
D) You have a short-term capital loss.

Question 62

Which of the following tax effects could not occur with the purchase and sale of a corporate bond?

A) Capital gain
B) Capital loss
C) Interest is taxed at ordinary rates.
D) Interest is not taxable.

Question 63

Which of the following statements is not true of corporate bonds?

A) They are debt securities issued by large companies.
B) They have long-term maturity dates.
C) They are very secure and almost never default.
D) They can offer a predictable source of income.

Question 64

A bond's yield to maturity is above its coupon rate when

A) the bond's market price is above par value.
B) the bond's market price is below par value.
C) the bond is convertible and the stock has appreciated.
D) interest rates are lower than the prime rate.

Question 65

A $1,000 face value bond with a quoted price of 98 is selling for

A) $1,000.
B) $98.
C) $980.
D) $988.

Question 66

If you buy a corporate bond for $970 and sell it six months later for $1,050, you will have

A) interest income of $80.
B) a short-term capital gain of $80.
C) a long-term capital gain of $80.
D) nontaxable income of $80.

Question 67

Use the following two columns of items to answer the matching questions below:
junk bonds

A)subject to a higher degree of default risk
B)issued by the U.S. Treasury

Question 68

As interest rates rise, the market price of your bond is also likely to rise.

Question 69

Use the following two columns of items to answer the matching questions below:
Treasury bonds

A)subject to a higher degree of default risk
B)issued by the U.S. Treasury

Question 70

Which of the following is not a characteristic of corporate bonds?

A) Have different ratings
B) Are long-term equity securities
C) Subject to default risk
D) Not backed by the federal government

Question 71

Which of the following is a characteristic of corporate bonds?

A) Rated on a scale from AAAA to FFFF
B) Used to finance debt over a short period such as six months
C) Issued as long-term debt securities
D) Exempt from state tax in the state where the issuing company has its headquarters

Question 72

Corporate bond quotations in the daily financial newspapers include all of the following, except

A) coupon rate and volume.
B) maturity and closing price.
C) current yield and net change from the previous day.
D) original face value of the bond.

Question 73

A corporate bond with a rating below ________ is considered to be a junk bond.

A) AAA
B) A
C) BBB
D) B

Question 74

Another name for high-yield bonds is

A) agency bonds.
B) federal agency bonds.
C) T-bills.
D) junk bonds.

Question 75

A $1,000 bond with a coupon rate of 6.5% has a market price of $950. What is the current yield?

A) 6.5%
B) 6.8%
C) 7.0%
D) 6.2%

Question 76

The relationship between a bond's price and the yield to maturity

A) changes at a rate equal to the change in yield.
B) is linear.
C) is inverse.
D) is relative.

Question 77

When a bond has a call feature, the investor should consider the ________ when deciding whether to invest in the bond if it is not selling at par value.

A) convertibility provision
B) interest rate
C) yield to call
D) yield to maturity

Question 78

The City of Chicago would issue ________ if it wished to borrow money.

Question 79

A(n) ________ corporate bond will pay a ________ return.

A) lower-rated; higher
B) higher-rated; higher
C) lower-rated; lower
D) unrated; lower

Question 80

Which of the following issuers' bonds would be subject to both federal and state income taxes?

A) City of Chicago
B) Saline, Michigan School District
C) Apple, Inc.
D) U.S. Treasury