Deck 15: The Bond Market

Question 1

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

Answer 1

True

Question 2

Mortgage bonds are secured by property.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Debentures are secured by equipment.

Question 5

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

Question 6

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

Question 7

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

Question 8

Bonds pay a flow of income called interest.

Question 9

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

Question 10

Today few bonds are issued in "book entry" form.

Question 11

Bonds with similar ratings and different terms to maturity tend to have different yields.

Question 12

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

Question 13

A publicly held bond has a trustee who makes certain that the terms of the indenture are fulfilled.

Question 14

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

Question 15

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

Question 16

The indenture specifies the terms of a bond.

Question 17

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

Question 18

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

Question 19

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

Question 20

Interest accrues daily on long-term bonds but is usually distributed only twice a year.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

Euro-bonds are denominated in dollars.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

Split coupon bonds offer special tax advantages to investors.

Question 33

European firms issue Euro-bonds in the United States.

Question 34

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

Question 35

The term of an extendible bond is known with certainty.

Question 36

A zero coupon only pays interest when it is sold.

Question 37

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

Question 38

A diversified portfolio of high-yield securities may be achieved with ten or fewer bonds.

Question 39

A firm may not repurchase bonds at a discount.

Question 40

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

Question 41

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 42

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 43

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 44

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 45

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 these choices

Question 46

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

Question 47

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 these choices

Question 48

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 49

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 50

Virtually all bonds have each of the following except

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

Question 51

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

Question 52

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 53

In general,income bonds are less risky than

A) mortgage bonds
B) secured debt
C) preferred stock
D) short-term debt obligations

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

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 56

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 57

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 58

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

Question 59

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

Question 60

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 61

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