Deck 14: Bond Fundamentals

Question 1

A bond denominated in US 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.

Answer 1

B

Question 2

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.

Answer 2

C

Question 3

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)

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

The following are participating issuers in bond markets:

A) governments.
B) school districts.
C) corporations.
D) a and c.
E) a, b and c.

Question 9

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 10

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 11

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

A) variable rate mortgages.
B) collateralised mortgage obligations (CMOs)
C) leveraged buyouts (LBOs)
D) deep discount bonds (DDBs)
E) high yield bonds.

Question 12

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 13

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

A) corporate
B) high yield/emerging market
C) securitised/collateralised
D) sovereign
E) quasi & foreign governments

Question 14

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 15

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.