Deck 13: Investing in Bonds and Other Alternatives

Question 1

XYZ company issued callable bonds three years ago with a 7% coupon rate.Today,the market rate of interest was lowered to 4%.What most likely will happen next?

A)XYZ company will lower the par value of their bonds.
B)XYZ company will raise the coupon rate of their bonds.
C)XYZ company will call their bonds in.
D)None of the above is correct.

Answer 1

XYZ company will call their bonds in.

Question 2

An unsecured long-term bond is known as a(n)

A)bondenture.
B)indenture.
C)debenture.
D)abdenture.

Answer 2

debenture.

Question 3

Which of the following determines what the annual interest payment on a bond will be?

A)The par value of the bond
B)The maturity date of the bond
C)The coupon rate of the bond
D)All of the above are correct.
E)Only A and C are correct.

Answer 3

Only A and C are correct.

Question 4

Bonds that do not pay interest are known as no-load bonds.

Question 5

What is the purpose of the sinking fund?

A)To force the issuing company to save money to retire the bonds at maturity
B)To raise outside capital to sink back into the company
C)To cause the coupon rate to increase
D)None of the above is correct.

Question 6

Any bond that is backed by the pledge of collateral is known as what type of bond?

A)Collateralized
B)Secured
C)Recalled
D)Sinking
E)Agency

Question 7

Why might you consider investing in bonds?

A)Bonds reduce risk through diversification.
B)Bonds produce steady income.
C)Bonds can be safe investment if held to maturity.
D)All of the above

Question 8

The ________ is the face value of a bond,and the amount that is returned to the bondholder at maturity.

A)return price
B)par value
C)dead price
D)market price
E)none of the above

Question 9

The par value of the bond is the rate at which payments will be made to the bondholder annually,in the form of interest.

Question 10

If you are already retired and seek additional income,then bonds as an investment choice would be wise.

Question 11

The issuer of the bond is effectively loaning money to the bondholder when the bond is purchased.

Question 12

Bonds enjoy all but one of the following advantages.Which is it?

A)When interest rates drop,bond prices rise.
B)Bonds may be called when interest rates drop.
C)They reduce risk through diversification.
D)Bonds produce steady income.
E)They can be a safe investment if held to maturity.

Question 13

You hold in your hands a legal document that provides the specific terms of the loan agreement,including a description of the bond,as well as the rights of the bondholder.You have a(n)

A)agency contract.
B)bond signatory.
C)signatory contract.
D)indenture.
E)debenture.

Question 14

Bonds reduce risk through diversification.

Question 15

State or municipal bonds that have interest and par value paid for with funds from a designated project or specific tax are known as ________ bonds.

A)Series EE
B)life cycle
C)revenue
D)general obligation
E)none of the above

Question 16

What could happen if you sell a bond before its maturity date?

A)You could have a capital gain.
B)You could have a capital loss.
C)You could break even with the price you paid for the bond.
D)All of the above are correct.
E)Only A and C are correct.

Question 17

Herman Melville never thought of a bond as being a ________ and that he would be a ________ when securing one until he read about it in his personal finance text.

A)lien;borrower
B)loan;borrower
C)loan;lender
D)lien;debenture
E)lien;lender

Question 18

The face value of a bond,or the amount that is returned to the bondholder at maturity is also known as the bond's denomination.

Question 19

Bonds which are very low rated,yet high yielding bonds are known as junk bonds.

Question 20

Bond issuers may do something very important for the bondholder that increases the probability the debt will be successfully paid off at maturity.The issuer

A)establishes a sinking fund.
B)sets a fixed interest rate.
C)has the bond indentured.
D)has the bond deferred.

Question 21

Your friend wants you to seriously consider investing in bonds like she did.Why?

Question 22

An indenture is an unsecured long-term bond.

Question 23

Peter must read the ________,or legal agreement between the firm issuing the bond and the bond trustee who represents the bondholders.

A)contract
B)indenture
C)provisions
D)debenture
E)prospectus

Question 24

Interest payments on municipal bonds are exempt from federal taxes and state taxes as long as you live in the state in which the bonds were issued.

Question 25

You own a(n)________ certificate,which is a certificate that represents a portion of ownership in a pool of federally insured mortgages.

A)interest
B)mortgage bond
C)collateral
D)pass-through
E)none of the above

Question 26

The bond that you own does not pay any interest.Instead,it is sold at a "discount" from its maturity value.This is a ________ bond.

A)no interest
B)face discount
C)growth
D)zero coupon
E)none of the above

Question 27

The long-term bond you own was issued by IBM Corporation and used no collateral.This is an example of a(n)

A)unsecured mortgage.
B)credit.
C)debenture.
D)nomenclature.
E)none of the above.

Question 28

If the school district wants to build a new high school,they can sell municipal bonds.

Question 29

A secured bond is one that is backed by collateral.

Question 30

Randall has $25,000 and is considering investing in bonds.With this amount of start up money he should look into which of the following bonds?

A)Agency bonds
B)Corporate bonds
C)Pass-through certificates
D)All of the above would be good choices.

Question 31

An I bond is an accrual-type bond,meaning that interest is added to the value of the bond and paid when the bond is cashed in.

Question 32

The biggest single payer in the bond market is the U.S.Government.

Question 33

TIPS are treasury bonds for which the par value changes with the consumer price index.

Question 34

What is the purpose of the call provision on some bonds?

Question 35

A debenture is a long-term bond secured by collateral.

Question 36

Governments issue savings bonds such as the Series EE bonds in an attempt to meet the investing needs of the small investor.

Question 37

Most corporate bonds are tax-free bonds in the state the corporation is based in.

Question 38

If you were considering the purchase of a bond issued by a state,county,or city you would be considering the purchase of a ________ bond.

A)state
B)municipal
C)government hedge
D)corporate
E)none of the above

Question 39

The largest single player and payer in the bond market

A)is corporate America.
B)are municipal bond issuers.
C)is the U.S.government.
D)are foreign firms.
E)are schools and county governments.

Question 40

Provide an explanation of the basic bond terminology and features.

Question 41

The interest rate carried on agency bonds,such as FNMA and FHLB,is ________ the interest rate on Treasury bonds.

A)higher than
B)lower than
C)usually the same as
D)at most half that of
E)none of the above

Question 42

________ bonds are sold electronically,and they are now sold at face value;that is,you pay $50 for a $50 bond.

A)Electronic Series EE
B)I
C)Paper Series EE
D)Only A and B

Question 43

Which of the following starts off with the highest risk bond and ends with the lowest risk bond?

A)Municipal,Corporate,Treasury,Junk
B)Corporate,Junk,Treasury,Municipal
C)Junk,Corporate,Municipal,Treasury
D)Corporate,Junk,Municipal,Treasury

Question 44

Zero coupon bonds are sold at a ________ to their face value.

A)Premium
B)Discount
C)Equal
D)Zero

Question 45

Because junk bonds carry a much higher risk of default,they also carry an interest rate ________ percent above the AAA grade long-term bonds.

A)1 - 2
B)3 - 6
C)7 - 9
D)10 - 12
E)20 - 25

Question 46

The city of Houston passed a bond issue to build a bridge over the bay.The bond was to have the interest paid by the income generated by charging drivers a toll to cross the bridge.This is an example of a ________ bond.

A)collateralized
B)cash
C)revenue
D)general obligation
E)none of the above

Question 47

When there are changes in the consumer price index,there is a corresponding change in the par value of

A)TIPS.
B)Series EE bonds.
C)I Bonds.
D)Munis.

Question 48

The advantages of Treasury bonds include

A)there is no default.
B)they can't be called in.
C)most interest is free of state and local taxes.
D)all of the above.
E)only A and C.

Question 49

One of the problems with most bonds is that their coupon payment is fixed and rising inflation weakens the purchasing power of their coupon payments.Which of the following bonds is the best option during times of high inflation?

A)FNMA Agency bonds
B)TIPS
C)High grade corporate bonds
D)High yield speculative bonds

Question 50

The corporate bond that you own is backed by the corporation's Houston,Texas real estate holdings.If the company defaults,these holdings could be liquidated to repay the debt.This is an example of a ________ bond.

A)mortgage
B)debenture
C)liquidation
D)credit
E)none of the above

Question 51

Coupon interest rates determine?

A)The rate to price the bond
B)Annual cash flow from the bond
C)How much investors are willing to pay
D)What the bond can be called at

Question 52

Callable bonds tend to be called when interest rates

A)go up.
B)stay about the same.
C)go down.
D)move in an upward pattern.

Question 53

Treasury bonds are generally viewed as being risk-free,given the government's ability to ________ and ________.

A)tax people;do volume business
B)tax corporations;do volume business
C)tax;print more money
D)print money;do volume business
E)none of the above

Question 54

Outline,with a brief description,the different types of bonds.

Question 55

Brittany has learned in her research that ________ are issued by the FNMA and the FHLB.

A)pass-through certificates
B)agency bonds
C)treasury bonds
D)treasury inflation-indexed bonds

Question 56

Why are the tax implications of investing in bonds more involved than the tax implications of investing in common stock?

Question 57

The difference between Treasury Bills,Notes and Bonds are

A)taxes.
B)default risk.
C)types of governments issuing.
D)maturity.

Question 58

Which of the following bonds would be appropriate for a retired person seeking a stream of income during retirement?

A)U)S.Treasury
B)Investment grade corporate bond
C)Municipal bond
D)All of the above are correct.

Question 59

Because there is no default or call risk associated with government bonds,they generally pay ________ rate of interest than other bonds.

A)a higher
B)a lower
C)the same
D)none of the above

Question 60

In the event that a corporation files for bankruptcy,bond trustees have the power to

A)issue new bonds.
B)recall outstanding bonds.
C)sell the corporations secured assets and use the proceeds to pay the bondholders.
D)change the interest rate on outstanding bonds.

Question 61

You are considering the purchase of one of two different bonds,a muni,which currently yields 6%,and a corporate,which currently yields 10%.If you are trying to maximize your return and you are in a 38% tax bracket,which of the following is true?

A)The muni bond has a better yield for you.
B)The corporate bond has a better yield for you.
C)The bonds have identical yields for you.
D)There is not enough information to determine which is a better yield for you.

Question 62

Using a financial calculator calculate the value of a bond that matures in 20 years with a coupon interest rate of 10%,which is the required rate of return,and a par value of $1,000.

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

Question 63

In comparing municipal bonds to other taxable bonds,the comparison must be between equivalent taxable yields.

Question 64

The yield to maturity for a bond with eight years to maturity,with a face value of $1,000,pays 10 percent annual coupon and currently sells for $1,950,is 5 percent.

Question 65

When a bond is bought at a premium price above its par value,the current yield will be lower than the coupon rate.

Question 66

A bond's yield is always exactly the same as its coupon interest rate.

Question 67

The current yield,the coupon rate,and the yield to maturity are equal if the bond sells at par value.

Question 68

A bond rating is really a measure of a bond's

A)performance.
B)yield.
C)market value.
D)riskiness.
E)yield to maturity.

Question 69

What is the value of a $1,000 par value bond with a 12% annual coupon that will mature in 5 years if the bond is currently priced to yield 10%?

A)$955.76
B)$1,000.00
C)$1,075.82
D)$1,158.52

Question 70

Sherman has three bonds with a $1,000 par value that pay a 9% coupon interest rate.How much will he earn every six months?

A)$27
B)$90
C)$135
D)$202.50
E)$270

Question 71

You have a corporate bond that pays interest every six months.Its par value is $1,000 and it carries a coupon rate of 10%.What is your accrued interest on the bond if it has been four months since interest was last paid?

A)$33.33
B)$50.00
C)$66.66
D)$100.00
E)None of the above

Question 72

For a long-term investor,the yield to maturity is the most important yield to determine.

Question 73

Investors require a higher rate of return on bonds with higher bond ratings.

Question 74

When a bond is bought at a discount price below its par value,the current yield will be higher than the coupon rate.

Question 75

Gail used her financial calculator to calculate her bond's yield to maturity.Given the following information what was her yield? N = 10;PV = -880.00;PMT = 100;FV = 1000.

A)10.0%
B)8)80%
C)10.18%
D)12.14%
E)none of the above

Question 76

Karyn wants to evaluate some bonds she is contemplating buying.In order to adequately evaluate them,she should check the bond yields,read the bond quotes in a paper,and check the

A)par values.
B)bond ratings.
C)company rating.
D)company's performance.

Question 77

Junk bonds are also known as

A)treasury bonds.
B)low yield bonds.
C)high yield bonds.
D)munis.

Question 78

There is an inverse relationship between interest rates and bond values.

Question 79

Coupon interest is usually paid in quarterly installments.

Question 80

Michael Milkman has suggested that you consider the purchase of some bonds that are rated BB or below.He is asking you to purchase ________ bonds.

A)junk
B)very risky
C)high-yield
D)All of the above
E)Only A and B.