Question 1

The price at which a dealer will purchase a bond is referred to as the _____ price.

Accepted Answer

The bid price is the price at which a dealer or buyer is willing to purchase a bond.

Question 2

Travis recently purchased a callable bond.However, that bond cannot be currently redeemed by the issuer.Thus, the bond must currently be:

Accepted Answer

The bond is call protected, meaning it cannot be redeemed by the issuer until a certain period has passed.

Question 3

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Accepted Answer

A sinking fund is an account that a bond trustee manages for the sole purpose of redeeming bonds early.

Question 4

On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

Accepted Answer

The principal amount of a bond is typically repaid in full on the maturity date.

Question 5

A protective covenant:

Accepted Answer

A protective covenant is a clause in a bond contract that limits certain actions of the borrower to protect the interests of the bondholders.

Question 6

Miller Farm Products is issuing a 15-year, unsecured bond.Based on this information, you know that this debt can be described as a:

Accepted Answer

A debenture is a type of unsecured bond, which means it is not backed by any specific collateral.

Question 7

The price at which an investor can purchase in the bond market is called the _____ price.

Accepted Answer

The "asked" price is the price at which an investor can purchase a bond in the market.

Question 8

A company originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.These bonds are referred to as:

Accepted Answer

Bonds that were originally issued with an investment-grade rating but have been downgraded to junk status are referred to as "fallen angels."

Question 9

The written agreement that contains the specific details related to a bond issue is called the bond:

Accepted Answer

The bond indenture is the legal document that outlines the specific terms and conditions of a bond issue, including the rights and responsibilities of both the issuer and the bondholders.

Question 10

The market-required rate of return on a bond that is held for its entire life is called the:

Accepted Answer

The yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures, reflecting the market-required rate of return.

Question 11

This morning, Jeff found an aged bond certificate lying on the street.He picked it up and noticed that it was a 50-year bond that matured today.He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment.The bond that Jeff found must have been which one of the following?

Accepted Answer

Bearer-form bonds are unregistered and whoever holds the physical certificate can claim the interest and principal payments, which explains how Jeff was able to receive payment without any registration.

Question 12

A bond's annual interest divided by its face value is referred to as the:

Accepted Answer

The coupon rate is the bond's annual interest payment divided by its face value.

Question 13

Russell's has a bond issue outstanding.The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance.This provision is referred to as the _____ provision.

Accepted Answer

The provision that restricts a company from redeeming its bonds for a certain period is known as a deferred call provision.

Question 14

A call provision grants the bond issuer the:

Accepted Answer

A call provision allows the bond issuer to repurchase the bonds before maturity at a predetermined price, which is typically higher than the face value.

Question 15

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Accepted Answer

When a bond is priced at par, its coupon rate will be equal to both its current yield and yield to maturity. If a bond is priced at par, its coupon rate will equal its current yield and its yield to maturity. This is because the coupon payments and principal repayment at maturity will exactly offset the investor's purchase price, resulting in an overall yield equal to the coupon rate.

Question 16

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Accepted Answer

A zero coupon bond is sold at a deep discount and does not make periodic interest payments, only paying the face value at maturity.

Question 17

The call premium is the amount by which the:

Accepted Answer

The call premium is the amount by which the call price of a bond exceeds its par value.

Question 18

The current yield on a bond is equal to the annual interest divided by the:

Accepted Answer

The current yield on a bond is calculated by dividing the annual interest payment by the bond's current market price.

Question 19

A registered-form bond is defined as a bond that:

Accepted Answer

A registered-form bond is one where the issuer keeps records of the bondholder's name and pays interest directly to the owner of record.

Question 20

What is the principal amount of a bond that is repaid at the end of the loan term called?

Accepted Answer

The principal amount of a bond that is repaid at the end of the loan term is called the "Face value."

Quiz 6: Interest Rates and Bond Valuation