Deck 16: Investing in Bonds

Question 1

During their lifetime,bonds can be sold for more or less than their face value depending on the demand for these particular bonds.

Answer 1

True

Question 2

Bonds are issued with a callable feature when the issuers expect interest rates to rise.

Answer 2

False

Question 3

If you want to receive periodic income from your investments,you should consider investing in bonds rather than stocks.

Answer 3

True

Question 4

Which of the following is not a feature of a bond?

A)Convertible
B)Dividends
C)Tax-free
D)Callable

Question 5

Generally,bonds have maturities between 10 and 30 years and pay interest annually.

Question 6

A call feature on bonds allows the issuer to buy back the bonds from investors before the maturity date.

Question 7

Which of the following is not a reason investors purchase bonds?

A)Conservative investment
B)Pay periodic income
C)May be convertible
D)Have high risk and return

Question 8

A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured.

Question 9

Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature.

Question 10

The bond par value or face value is the amount the investor will get paid when the bond matures.

Question 11

Bonds usually pay interest

A)annually.
B)semi-annually.
C)quarterly.
D)monthly.

Question 12

When a bond has a par or face value of $1,000 and a 6 percent coupon rate,the semi-annual payment would be $60.

Question 13

Which of the following is not always a true statement?

A)The par value of a bond is its face value.
B)The par value of a bond is its market value.
C)The par value of a bond will be paid to the bond holder at maturity.
D)The par value multiplied by the coupon rate equals the interest paid to investors annually.

Question 14

You should consider investing in bonds rather than stock if you

A)are willing to take more risk.
B)wish to receive income from your investment.
C)are willing to tie up your investment for a long period.
D)think interest rates will increase significantly in the near future.

Question 15

Investors purchase bonds because

A)they are a risk-free investment.
B)they pay interest income.
C)they pay dividends.
D)the returns are higher than stocks.

Question 16

The ________ is the amount returned to the investor at the maturity date when the bond is due.

A)principal
B)interest gain
C)capital gain
D)terminal value

Question 17

A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.

Question 18

Bonds are equity investments issued by corporations or government agencies.

Question 19

An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity.

Question 20

Because convertibility is a desirable feature for investors,convertible bonds tend to offer a higher return than non-convertible bonds.

Question 21

The coupon rate of interest on a bond is always stated as a(n)

A)daily rate.
B)monthly rate.
C)semi-annual rate.
D)annual rate.

Question 22

Investors are willing to purchase bonds with a call feature only if the bonds offer a(n)

A)slightly lower return than similar bonds without a call feature.
B)slightly higher number of shares of the issuer's stock.
C)slightly higher return than similar bonds without a call feature.
D)extraordinary return similar to an IPO.

Question 23

Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?

A)Par value
B)Call feature
C)Convertibility
D)Yield to maturity

Question 24

Investing in bonds gives you the possibility of all of the following except

A)having a capital gain.
B)losing your investment if the company goes bankrupt.
C)receiving dividends.
D)receiving the face value at maturity.

Question 25

If a company's stock price is expected to increase substantially over the next few years,which of the following may entice potential bondholders to accept a lower coupon rate?

A)Par value
B)Call feature
C)Convertibility
D)Reserve feature

Question 26

The return on bonds currently held will be more favorable if interest rates ________ over the period you hold the bonds.

A)increase
B)decrease
C)stabilize
D)remain the same

Question 27

Convertible bonds tend to offer a(n)________ return than non-convertible bonds.

A)higher
B)lower
C)similar
D)indexed

Question 28

Another name for the par value of a bond is its ________.

Question 29

If a company anticipates a substantive decline in interest rates in the future,which of the following are they likely to include in a bond?

A)Par value
B)Call feature
C)Convertibility
D)Reverse dividend

Question 30

On the secondary bond market,

A)only new bonds can be sold.
B)bonds are guaranteed to bring at least par value.
C)bond prices vary with interest rate movement and other factors.
D)bonds usually take several days to sell.

Question 31

If a bond can be exchanged for common stock at the discretion of the bondholder,the bond is a(n)________.

Question 32

What is the semi-annual interest payment on a $1,000 bond with a 7 percent coupon rate?
(a)$70
(b)$35
(c)$350
(d)$700

Question 33

A ________ feature on a bond allows the issuer to buy back the bond from the investor before maturity.

A)convertible
B)dividend
C)call
D)recall

Question 34

Bonds that may be exchanged for common stock at the option of the bondholders are called

A)options.
B)convertible bonds.
C)callable bonds.
D)stock bonds.

Question 35

Municipal bonds are those issued by the U.S.Treasury Department for the benefit of cities and states.

Question 36

Callable bonds are issued when interest rates are expected to

A)stay the same.
B)decline.
C)rise.
D)None of the above.

Question 37

If a bond's price were lower than the principal amount,its yield to maturity would be ________ than the coupon rate.

A)less
B)more
C)equal to
D)no relation to

Question 38

The interest received from U.S.Treasury bonds is exempt from federal,state,and local income taxes.

Question 39

Since municipal bond interest is exempt from federal income tax,it is especially beneficial to high-income investors.

Question 40

If a bond pays $50 interest semi-annually with a par value of $1,000,its coupon rate is:
(a)5 percent
(b)10 percent
(c)15 percent
(d)20 percent

Question 41

Which of the following bond issuers would be subject to both federal and state income taxes?

A)City of Chicago
B)Saline,Michigan School District
C)National Semiconductor
D)U)S.Treasury

Question 42

The City of Chicago would issue ________ if they wished to borrow money.

Question 43

Which of the following is not true of corporate bonds?

A)They are debt securities issued by large companies
B)They have long-term maturity dates
C)They are very secure and almost never default
D)They offer a predictable source of income

Question 44

Ginnie Mae is an example of a bond issued by

A)a corporation.
B)the U.S.Treasury.
C)a municipality.
D)an agency of the federal government.

Question 45

Treasury bonds have all except which of the following characteristics?

A)Long-term debt securities
B)Issued by the U.S.Treasury
C)Exempt from state and local taxes
D)Highly liquid

Question 46

________ bonds are issued by state and local government agencies.

A)Treasury
B)Municipal
C)Federal agency
D)Corporate

Question 47

A(n)________ corporate bond will pay a ________ return.

A)lower-rated; higher
B)higher-rated; higher
C)lower-rated; lower
D)unrated; lower

Question 48

A $1,000 bond with a coupon rate of 6.5 percent has a market price of $950.What is the last yield?
(a)6.5 percent
(b)6.8 percent
(c)7.0 percent
(d)6.2 percent

Question 49

Municipal bonds are most beneficial for investors whose tax bracket is

A)15% or less.
B)27% or more.
C)28% or more.
D)large enough to qualify for the earned income credit.

Question 50

Which of the following is not a characteristic of corporate bonds?

A)Have different ratings
B)Are long-term equity securities
C)Subject to default risk
D)Not backed by the federal government

Question 51

Another name for high-yield bonds is

A)corporate bonds.
B)federal agency bonds.
C)T-bills.
D)junk bonds.

Question 52

Corporate bond quotations in the daily financial newspapers include all except

A)coupon rate and volume.
B)maturity and last price.
C)last yield and net change from the previous day.
D)original face value of the bond.

Question 53

Which of the following is not true regarding municipal bonds?

A)They are issued by state and local governments
B)They are free from the risk of default
C)The interest is exempt from federal income taxes
D)The interest is exempt from state taxes if the investor resides in the same state where the bond was issued

Question 54

Federal agency bonds are all of the following except

A)are subject to state and federal taxes.
B)have a very low degree of default risk.
C)are issued to different mortgage programs.
D)are issued by organizations owned by the federal government.

Question 55

Junk bonds offer a relatively high rate of return,but they are more likely to default than other bonds.

Question 56

Issuing bonds has the following disadvantage.

A)The bondholders have voting rights
B)Bond interest expense is not tax deductible
C)Interest must be paid on a periodic basis regardless of earnings
D)Bondholders may require early repayment

Question 57

Municipal bonds tend to have a ________ coupon rate than Treasury bonds issued at the same time; however,municipal bonds usually offer a(n)________ after-tax return to investors.

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; equal

Question 58

________ bonds are the least risky of all bonds and,therefore,pay a lower rate of interest.

A)Treasury
B)Municipal
C)Federal agency
D)Corporate

Question 59

A $1,000 face value bond with a quoted price of 98 is selling for
(a)$1,000.
(b)$98.
(c)$980.
(d)$988.

Question 60

Last yield is calculated by

A)annual interest/par.
B)annual interest/market price.
C)annual interest/$1,000.
D)par value times 100.

Question 61

Name and explain two risks involved with bonds.

Question 62

On December 1,2004 a $1,000 bond,paying 6 percent interest on January 1st and July 1st of each year is purchased for $950.The bond is sold on December 5,2005 for $980.What would be the total monetary return including both interest and capital gains from holding this bond?
(a)$87
(b)$87.90
(c)$88.80
(d)$90

Question 63

If you expect interest rates to rise over time,you should consider investing in bonds with longer maturities.

Question 64

Which of the following tax effects could not occur with the purchase and sale of a corporate bond?

A)Capital gain
B)Capital loss
C)Interest is taxed at ordinary rates.
D)Interest is not taxable.

Question 65

If you buy a corporate bond for $970 and sell it six months later for $1,050,you will have

A)interest income of $80.
B)a short-term capital gain of $80.
C)a long-term capital gain of $80.
D)non-taxable income of $80.

Question 66

The possibility that a bond will be called by the corporation prior to its maturity is an example of a(n)________ risk.

Question 67

As interest rates go up,bond prices

A)also go up.
B)go down.
C)remain the same.
D)may go up or down.

Question 68

Figuring the present value of future coupon payments,along with the present value of the principal payment,is a good way to determine the value of a bond.

Question 69

Bonds with longer maturities are more sensitive to interest rate movements than bonds that have shorter maturities.

Question 70

To completely avoid the risk of default,investors can invest in Treasury bonds or A-rated corporate bonds.

Question 71

________ bonds do not contain a risk premium because they are free from default risk.

A)Treasury
B)Municipal
C)Corporate
D)City

Question 72

Bonds with a ________ degree of default risk are most susceptible to default when economic conditions are ________.

A)low; strong
B)high; weak
C)high; strong
D)low; weak

Question 73

The ________ is an additional return beyond the risk-free rate that can be earned from a deposit guaranteed by the government.

A)additional premium
B)risk premium
C)specific return
D)nominal return

Question 74

All bonds are subject to the following risks except

A)default risk.
B)call risk.
C)interest rate risk.
D)impact of economic conditions.

Question 75

The two future cash flows used to determine a bond value are the periodic coupon payments and the ________ at maturity.

Question 76

As interest rates rise,the market price of your bond is also likely to rise.

Question 77

The risk premium of bonds is the amount by which their annualized yield exceeds the Treasury bond yield.

Question 78

One important aspect of bond research includes finding the bond rating.Bond ratings are related to what type of risk?

Question 79

The risk that you will be forced to sell your bond back to the issuer prior to maturity is the

A)call (prepayment)risk.
B)default risk.
C)interest rate risk.
D)political risk.

Question 80

Bonds with ________ terms to maturity are ________ sensitive to interest rate movements than bonds that have short terms remaining until maturity.

A)middle; less
B)longer; less
C)longer; more
D)longer; equally