Deck 11: Bond and Fixed Income Fundamentals

Question 1

Like the stock market,there is a strong secondary market for bond issues,particularly corporate and municipal bonds.

Answer 1

False

Question 2

Changes in the market rate of interest are reflected in the semiannual interest payments of a variable rate note,while the price remains stable.

Answer 2

True

Question 3

An important feature of the GNMA pass-through certificate is that there is no principal balance at maturity.

Answer 3

True

Question 4

While the stock market has an active secondary market,the bond market consists primarily of investors who buy and hold bond issues to maturity.

Question 5

An after-acquired clause requires that new property must be placed under the original mortgage.

Question 6

The IRS taxes zero coupon bonds as if interest were paid semiannually even though no cash flow is received until maturity.

Question 7

Corporate issues make up the largest percentage of new debt offerings in the bond market.

Question 8

The major provisions in the bond agreement are spelled out in the bond debenture.

Question 9

Interest on federally sponsored credit agency issues (such as the Federal Home Loan Bank)is not tax free to the recipient.

Question 10

Interest and capital gains on municipal bonds are tax-exempt by the IRS.

Question 11

A sinking fund may be used to pay off a perpetual bond.

Question 12

Preferred stock dividends are tax deductible to the corporation,and also provide tax advantages to the corporate investor.

Question 13

Income bonds specify that interest is to be paid only to the extent that it is earned in current income.

Question 14

Income bonds are highly favored by corporations because they provide the benefits of tax-deductible interest payments without the contractual obligations of most debt instruments.

Question 15

A Treasury bill is a long-term obligation of the federal government.

Question 16

The dollar volume of new corporate debt issues has exceeded the dollar volume of new corporate equity issues for many years.

Question 17

A secured corporate bond is referred to as a debenture.

Question 18

An investor in a municipal bond will receive 8 percent interest.He is in a 33 percent tax bracket.The comparable before tax yield on a taxable investment is 14 percent. $$\frac { 8 \% } { ( 1 - .33 ) } = \frac { 8 \% } { .67 } = 11.94 \%$$

Question 19

A call provision allows the corporation to retire a bond before maturity by paying a small discount below par value.

Question 20

Corporate bonds carry a higher yield than government issues,and are fully taxable for federal,state and local purposes.

Question 21

A Treasury note normally has a maturity of

A)Less than one year
B)One to five years
C)One to 10 years
D)10 to 30 years
E)30 to 100 years

Question 22

There is evidence that the bond market may be less efficient that the stock market.

Question 23

The bond market investor must be prepared to deal in a relatively strong primary market (new issues market)and a relatively weak secondary market (resale market).

Question 24

A legal document which is administered by an independent trustee and spells out the major provisions of a bond agreement is called the

A)Bond contract
B)Bond indenture
C)Debenture
D)Bond subordination

Question 25

The higher the bond rating of a corporation,the higher the interest rate that is likely to be paid.

Question 26

In many respects,the bond market appears to demonstrate a high degree of rationality of risk and return.

Question 27

While Treasury bonds and bills are quoted on the basis of price,Treasury note are quoted on the basis of yield.

Question 28

A "split rating" means that bond rating agencies assigned different ratings.

Question 29

Which of the following types of bond issues are the most price sensitive?

A)Fixed rate long-term bonds
B)Floating rate bonds
C)Long-term zero coupon bonds
D)Fixed rate short-term bonds
E)Treasury bills

Question 30

Yankee bonds are issued by foreign governments,corporations or are traded in the U.S.and denominated (payable)in U.S.dollars.

Question 31

A corporation must generally pay taxes on only 15 percent of the dividends (preferred or common)that it receives from another corporation.

Question 32

Private placements refer exclusively to stock issues sold to insurance companies or individuals.

Question 33

Jumbo C.D.'s are $10,000 or greater in size.

Question 34

Foreign pay bonds are issued in a foreign country and payable in U.S.dollars.

Question 35

As the yield spread between high and low rating categories increases,this indicates a gain of confidence in the economy.

Question 36

Commercial paper represents a short-term credit instrument.

Question 37

Money market funds represent a vehicle to buy short-term fixed-income securities through a mutual fund arrangement.

Question 38

Foreign bonds normally provide:

A)Higher yields than U.S.bonds
B)Lower yields than U.S.bonds
C)Diversification benefits
D)None of the above

Question 39

The bond market is dominated by institutional investors.

Question 40

A bond quote of 91 7/8 on a $1,000 par value bond means the bond is trading at $918.75.

Question 41

All of the following are available to individual investors except

A)Commercial paper
B)Bankers' acceptances
C)Money market funds
D)All of the above are available to individual investors

Question 42

The largest segment of the corporate bond market consists of

A)Public utilities
B)Rails and transportation
C)Financial issues
D)Industrial issues

Question 43

Public utility issues have a greater yield than other corporate issues primarily because

A)Nuclear utility issues carry an extremely high risk premium
B)Public utility issues generally have a longer maturity
C)Investor demand for utility issues is greater than for other issues
D)Utilities demand for funds is greater than that of other segments

Question 44

Securities issued by the Federal Housing Administration

A)Are essentially risk-free
B)Carry a higher yield than U.S.Treasury securities
C)Are fully taxable by federal,state and local governments
D)All of the above

Question 45

Which of the following is NOT a characteristic of preferred stock as an investment?

A)Preferred stockholders are entitled to receive their dividend prior to payment of dividends to common stockholders
B)Preferred stock dividends are taxed at the capital gains rate for individual investors
C)Preferred stock dividends may be omitted by the corporation under certain circumstances
D)It is a hybrid security of common stock and debt

Question 46

Municipal bonds normally pay

A)Higher rates than taxable bonds
B)Lower rates than taxable bonds
C)The same rate as taxable bonds
D)None of the above

Question 47

For the major bond rating agencies,the lowest level of an investment grade bond is

A)AA (investment grade includes AAA and AA)
B)A (investment grade includes AAA,AA and A)
C)BBB (investment grade includes AAA,AA,A,and BBB)
D)B (investment grade includes AAA,AA,A,BBB,BB and B)

Question 48

A bond with a put provision allows the investor to

A)Convert the bond to a specified number of shares of common stock
B)Sell the bond back to the corporation at a small premium over par at a specified time period
C)Sell the bond back to the corporation at par at a specified time period
D)Receive additional interest payments if inflation goes above a specified level

Question 49

The demand side of the bond market is dominated by

A)The federal government
B)Wealthy individual investors
C)Institutional investors
D)None of the above

Question 50

The most important feature of municipal bonds is

A)The wide range of denominations and maturities
B)The interest is not taxable by the federal government
C)The risk-free nature of this investment
D)Its appeal to investors needing growth

Question 51

A strong incentive to a corporation to meet preferred stock dividend payments is provided by the ___________ feature of some preferred stocks.

A)Cumulative
B)Convertible
C)Callable
D)All of the above

Question 52

The difference between a general obligation and a revenue bond is:

A)The general obligation bond is backed by full faith,credit,and "taxing power" of the governmental unit
B)That for a revenue bond,the repayment of the issue is fully dependent on the revenue-generating capability of a specific project or venture
C)General obligation bonds are usually of high quality because of the taxing power behind most of them
D)All of the above

Question 53

The primary difference between jumbo and small Certificates of Deposit,besides dollar amount,is

A)That jumbo certificates have a variable interest rate
B)That small certificates are considered to be risk-free
C)There is no secondary market for small certificates of deposit
D)None of the above

Question 54

Treasury strips provide return through

A)Increase in value over its life
B)High dividend yields
C)Indexing for inflation
D)Changing par value with the passage of time

Question 55

Which of the following statements about U.S.treasury securities is ?

A)The interest earned on treasury bills is fully taxable by states
B)All treasury securities are considered to be risk-free
C)The maturities of treasury bills,notes and bonds tend to be different
D)More than one of the above is true

Question 56

An example of secured debt would be a:

A)Contract where two signatures specified how the contract would be paid
B)Contract in which a court kept the contract in its possession to see that nothing would happen to it
C)Contract in which real assets are pledged as security for a loan
D)Debenture

Question 57

A call feature may be valuable to:

A)Investors
B)The issuing company
C)Corporate employers
D)The IRS

Question 58

A provision in which semiannual or annual contributions are made by a corporation into a fund administered by a trustee for purposes of debt retirement is referred to as a:

A)Call provision
B)Put provision
C)Sinking-fund
D)Serial payment

Question 59

There is customarily a small spread between bid and asked prices of treasury notes and bonds because

A)They are traded at a discount from par
B)There is competition from other markets
C)The market for treasury issues is liquid
D)There are not many government securities dealers

Question 60

Junk bonds normally provide

A)A higher yield than treasury bonds
B)A lower yield than treasury bonds
C)A lower yield than AA corporate bonds
D)More than one of the above is true

Question 61

Assume a $1,000 Treasury bill is quoted to pay 6% interest over a three-month period.How much interest would the investor receive?

A)$10
B)$15
C)$20
D)$30
E)$60

Question 62

The yield spread between junk bonds and high quality bonds is greatest when

A)There is weak confidence in the economy
B)There is strong confidence in the economy
C)The yield curve is flat
D)The Federal Reserve is refinancing

Question 63

74 Assume a $1,000 treasury bill is quoted to pay 10 percent and matures in 3 months.
a)How much interest would an investor receive?
b)What will be the price of the treasury bill?
c)What will be the rate of return?

Question 64

Assume a $1,000 Treasury bill is quoted to pay 6% interest over a three-month period.What will be the price of the treasury bill?

A)$940
B)$970
C)$980
D)$985
E)$990

Question 65

Corporate bonds generally trade in units of

A)$100
B)$1,000
C)$5,000
D)$10,000

Question 66

Inflation-indexed Treasury securities provide returns through

A)Interest payments plus a conversion privilege
B)Interest payments plus an increase in value due to inflation
C)Tax exempt interest payments
D)Cumulative interest payments

Question 67

What is the dollar value of a U.S.government bond quoted at 98 8/32 ?

Question 68

Equipment trust certificates are used by firms such as:

A)Wholesalers
B)Railroads
C)Retailers
D)Homebuilders

Question 69

72 If an investor is in the 33 percent marginal tax bracket and can purchase a municipal bond paying 7.5 percent,what would the equivalent before-tax return from a corporate bond have to be to equate the two returns on a before tax basis.

Question 70

major investors in municipal bonds include

A)Banks
B)Pension funds
C)Wealthy individuals
D)A and c

Question 71

A corporate bond quoted at 108.25 is selling for

A)$108.25
B)$1082.50
C)$10,825
D)None of the above

Question 72

If inflation is higher than that expected at time of issue,inflation-indexed Treasury securities

A)Provide a lower return than fixed income securities
B)Provide a higher return than fixed income securities
C)Do not adequately compensate the investor for loss of purchasing power
D)May be called in by the government

Question 73

76 You buy a $1,000 inflation-indexed Treasury security that pays 5 percent annual interest.Assume inflation is 4 percent in the first two years you own the security.
a)What is the inflation adjusted value of the security after two years?
b)How much interest will be paid in the third year?

Question 74

The junk bond market includes all of the following,except:

A)Fallen angels
B)Profitable companies undergoing expansion
C)Growth companies (small firms not that well established,making them unable to receive an investment quality rating)
D)Companies undergoing restructuring because a LBO or unfriendly takeover

Question 75

Assume a $1,000 Treasury bill is quoted to pay 6% interest over a three-month period.What will be the effective yield?

A)6.09%
B)6.38%
C)3.05%
D)25.53%
E)1.53%

Question 76

73 Assume a $1,000 Treasury bill is quoted to pay 9.5 percent interest over a six month period.
a)How much interest would an investor receive?
b)What will be the price of the Treasury bill?
c)What will be the rate of return?