Deck 1: Fixed-Income Securities: Defining Elements

Question 1

if interest rates are expected to increase, the coupon payment structure most likely to ben- efit the issuer is a:

A) step-up coupon.
B) inflation-linked coupon.
C) cap in a floating-rate note.

Answer 1

C

Question 2

Which type of bond most likely earns interest on an implied basis?

A) Floater
B) Conventional bond
C) Pure discount bond

Answer 2

C

Question 3

an affirmative covenant is most likely to stipulate:

A) limits on the issuer's leverage ratio.
B) how the proceeds of the bond issue will be used.
C) the maximum percentage of the issuer's gross assets that can be sold.

Answer 3

B

Question 4

relative to an otherwise similar option-free bond, a:

A) putable bond will trade at a higher price.
B) callable bond will trade at a higher price.
C) convertible bond will trade at a lower price.

Question 5

a 10-year bond was issued four years ago. The bond is denominated in uS dollars, offers a coupon rate of 10% with interest paid semi-annually, and is currently priced at 102% of
Par) The bond's:

A) tenor is six years.
B) nominal rate is 5%.
C) redemption value is 102% of the par value.

Question 6

a South african company issues bonds denominated in pound sterling that are sold to investors in the united Kingdom. These bonds can be best described as:

A) eurobonds.
B) global bonds.
C) foreign bonds.

Question 7

Which of the following is a type of external credit enhancement?

A) Covenants
B) a surety bond
C) overcollaterization

Question 8

relative to domestic and foreign bonds, eurobonds are most likely to be:

A) bearer bonds.
B) registered bonds.
C) subject to greater regulation.

Question 9

an investor in a country with an original issue discount tax provision purchases a 20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond
Until the maturity date. The investor will most likely report:

A) a capital gain at maturity.
B) a tax deduction in the year the bond is purchased.
C) taxable income from the bond every year until maturity.

Question 10

The provision that provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond's maturity date is referred to as:

A) a put provision.
B) a make-whole call provision.
C) an original issue discount provision.

Question 11

Which of the following type of debt obligation most likely protects bondholders when the assets serving as collateral are non-performing?

A) Covered bonds
B) Collateral trust bonds
C) Mortgage-backed securities

Question 12

Which of the following provisions is a benefit to the issuer?

A) Put provision
B) Call provision
C) Conversion provision

Question 13

Which of the following best describes a negative bond covenant? The issuer is:

A) required to pay taxes as they come due.
B) prohibited from investing in risky projects.
C) required to maintain its current lines of business.

Question 14

a company has issued a floating-rate note with a coupon rate equal to the three-month libor + 65 basis points. interest payments are made quarterly on 31 March, 30 June, 30
September, and 31 december. on 31 March and 30 June, the three-month libor is 1.55%
And 1.35%, respectively. The coupon rate for the interest payment made on 30 June is:

A) 2.00%.
B) 2.10%.
C) 2.20%.

Question 15

The legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders can be best described as a bond's:

A) covenant.
B) indenture.
C) debenture.

Question 16

Clauses that specify the rights of the bondholders and any actions that the issuer is obli- gated to perform or is prohibited from performing are:

A) covenants.
B) collaterals.
C) credit enhancements.

Question 17

a bond that is characterized by a fixed periodic payment schedule that reduces the bond's outstanding principal amount to zero by the maturity date is best described as a:

A) bullet bond.
B) plain vanilla bond.
C) fully amortized bond.

Question 18

a 10-year, capital-indexed bond linked to the Consumer Price index (CPi) is issued with a coupon rate of 6% and a par value of 1,000. The bond pays interest semi-annually.
During the first six months after the bond's issuance, the CPi increases by 2%. on the
First coupon payment date, the bond's:

A) coupon rate increases to 8%.
B) coupon payment is equal to 40.
C) principal amount increases to 1,020.

Question 19

investors who believe that interest rates will rise most likely prefer to invest in:

A) inverse floaters.
B) fixed-rate bonds.
C) floating-rate notes.

Question 20

a sovereign bond has a maturity of 15 years. The bond is best described as a:

A) perpetual bond.
B) pure discount bond.
C) capital market security.

Question 21

Which type of call bond option offers the greatest flexibility as to when the issuer can exercise the option?

A) a bermuda call
B) a european call
C) an american call

Question 22

Which of the following best describes a negative bond covenant? The requirement to:

A) insure and maintain assets.
B) comply with all laws and regulations.
C) maintain a minimum interest coverage ratio.

Question 23

Which of the following best describes a convertible bond's conversion premium?

A) bond price minus conversion value
B) Par value divided by conversion price
C) Current share price multiplied by conversion ratio

Question 24

investors seeking some general protection against a poor economy are most likely to select a:

A) deferred coupon bond.
B) credit-linked coupon bond.
C) payment-in-kind coupon bond.

Question 25

The benefit to the issuer of a deferred coupon bond is most likely related to:

A) tax management.
B) cash flow management.
C) original issue discount price.

Question 26

Contrary to positive bond covenant, negative covenants are most likely:

A) costlier.
B) legally enforceable.
C) enacted at time of issue.

Question 27

a five-year bond has the following cash flows: The bond can best be described as a:

A) bullet bond.
B) fully amortized bond.
C) partially amortized bond.

Question 28

Which of the following bond types provides the most benefit to a bondholder when bond prices are declining?

A) Callable
B) Plain vanilla
C) Multiple put