Deck 13: The Bond Market

Question 1

Debentures are bonds that are secured by equipment.

Answer 1

False

Question 2

When an investor purchases a bond, that individual receives accrued interest from the seller.

Answer 2

False

Question 3

Since bonds are legal obligations, their prices are determined when issued and do not change.

Answer 3

False

Question 4

Default means the failure to meet any of the terms of a bond's indenture.

Question 5

A bond's seller pays accrued interest to the buyer.

Question 6

Mortgage bonds are secured by property.

Question 7

Bonds with comparable ratings but different terms to maturity tend to have different yields.

Question 8

Since bonds are legal obligations, there is little risk associated with purchasing these securities.

Question 9

The indenture specifies the terms of a bond.

Question 10

A negatively sloped yield curve occurs when short-term rates exceed long-term rates.

Question 11

The current yield and the yield to maturity are equal if a bond sells for its par value.

Question 12

Under current law, American corporations may not issue bearer bonds with coupons attached.

Question 13

Bonds pay a flow of income called "interest."

Question 14

A publicly held bond has a trustee who enforces the terms of the indenture.

Question 15

The structure of yields generally suggests that long-term bonds have greater yields.

Question 16

One source of risk associated with investments in bonds is the possibility of default.

Question 17

A bond that is traded "flat" has a fixed coupon.

Question 18

In most cases, interest accrues daily on long-term bonds but distributed only twice a year.

Question 19

Federal government bonds are among the least risky bonds because the federal government has the power to tax and print money.

Question 20

The coupon on the variable interest rate bond varies with changes in interest rates.

Question 21

If a firm repurchases bonds at a discount, the difference between the principal amount and the purchase price produces taxable income.

Question 22

Split coupon bonds offer investors special tax advantages.

Question 23

A Euro-bond is denominated in the currency of a European nation.

Question 24

A "fallen angel" was once a quality bond whose issuing firm is currently having financial problems.

Question 25

A strong sinking fund makes the bond riskier because it is harder for the firm to retire the debt.

Question 26

Euro-bonds are denominated in dollars.

Question 27

A call penalty protects the firm from early retirement of the bond.

Question 28

A zero coupon only pays interest when it is sold.

Question 29

One advantage to the issuing firm of a split coupon bond is that cash is initially conserved.

Question 30

The term of an extendible bond is known with certainty.

Question 31

A split coupon bond combines a zero coupon bond with a high coupon bond.

Question 32

Interest on a convertible bond may be exchanged for stock instead of cash.

Question 33

Income taxation on the interest earned from an investment in a zero coupon bond occurs when the bond matures.

Question 34

If a firm repurchases debt at a discount, its net income is increased.

Question 35

If an American investor buys a Euro-bond and the value of the dollar rises, that individual earns a larger return on the investment.

Question 36

An investor concerned with safety of principal may purchase preferred stock instead of bonds issued by the same company.

Question 37

Calculation of the returns earned on a high-yield security should include the sale price of the bond as well as the interest received.

Question 38

A bond with a balloon payment cannot have a sinking fund.

Question 39

A firm may not repurchase bonds at a discount.

Question 40

Interest accrues on a zero coupon bond but not on a term bond.

Question 41

A call penalty (i.e., call premium)protects the

A)investor against premature retirement of the bond
B)investor from default
C)issuer from rising interest rates
D)issuer from the bondholder requesting payment

Question 42

A high yield bond

A)pays no interest
B)pays interest only at maturity
C)is a high-risk debt instrument
D)is a bond in default

Question 43

A negatively sloped yield curve suggests  
1. short-term rates exceed long-term rates
2. long-term rates exceed short-term rates
3. the Federal Reserve is following a tight monetary policy
4. the Federal Reserve is following an easy monetary policy

A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question 44

A fallen angel is

A)a quality bond whose credit rating has declined
B)a firm in financial difficulty
C)a junk bond in default
D)a firm being liquidated

Question 45

Bonds may be retired by
1. being called
2. a sinking fund
3. being repurchased

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 46

A split coupon bond

A)distributes interest in cash and additional debt
B)combines features of zero coupon bonds and secured bonds
C)has a period of no coupon and a period with a high coupon
D)conserves the investor's cash

Question 47

Zero coupon bonds

A)are sold at a discount
B)are sold for a premium
C)accrue interest at maturity
D)cannot be called

Question 48

A call feature is an option while a sinking fund requires a mandatory payment by the firm.

Question 49

Zero coupon and split coupon bonds

A)experience stable prices
B)conserve the firm's cash
C)reduce the firm's use of financial leverage
D)pay interest only at maturity

Question 50

If a bond has a call feature, it often has a call penalty, which must be paid to the bondholder in partial compensation for the early retirement of the bond.

Question 51

As the length of time to maturity (i.e., the term)of a bond increases, generally

A)the coupon rate rises
B)the coupon rate falls
C)the riskiness of the bond falls
D)the price of the bond rises

Question 52

In a typical bond classification

A)"A" are investment grade bonds
B)"B" stands for a "bearer" bond
C)"C" stands for a convertible bond
D)"D" represents a debenture

Question 53

Equipment trust certificates are

A)riskier than convertible bonds
B)secured debt obligations
C)a type of debenture
D)bonds with low credit ratings

Question 54

Serial bonds

A)have a sinking fund
B)are issued and retired in a series
C)are a type of income bond
D)are primarily issued by the federal government

Question 55

The accrued interest on a bond

A)avoids personal income taxation
B)is paid by the buyer of the bond to the seller of the bond
C)is the result of the possibility of the bond defaulting
D)applies only to zero coupon bonds

Question 56

Risk to bondholders comes from
1. possibility of default
2. higher interest rates
3. higher inflation

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 57

When an investor purchases a bond, he or she

A)pays accrued interest
B)receives accrued interest
C)pays accrued dividends
D)receives accrued dividends

Question 58

A firm will exercise its option to call a bond if interest rates rise.

Question 59

Virtually all bonds have each of the following except

A)interest payments
B)maturity date
C)voting rights
D)an indenture

Question 60

Variable interest rate bonds

A)do not mature
B)are an example of a discount bond
C)have fluctuating coupons
D)are nonmarketable securities

Question 61

A bond matures in 2020 and has an annual coupon of 3.65 percent, payable on January 1 and July 1. The current price of the $1,000 bond is $978. On February 1, you purchase $10,000 face amount, and your broker charges a $25 commission. How much must you remit for the purchase?

Question 62

A company may call a bond if

A)interest rates have risen
B)interest rates have fallen
C)the company's dividend is increased
D)the company's dividend is decreased

Question 63

You own a $10,000 bond that pays interest of 5.6 percent annually. If you are in the 30 percent federal income tax bracket, what is the annual tax owed if the bond is (a)in your regular personal account or (b)in your traditional retirement account (IRA)?

Question 64

A $1,000 zero coupon bond matures in five years and sells for $784 to yield 5 percent. The accrued interest for the first year is $39. You are in the 30 percent federal income tax bracket. What is tax owed on the interest if the bond is (a)in your regular personal account or (b)in your Roth retirement account (IRA)?