Deck 14: Bonds

Question 1

An advantage of a convertible corporate bond is _________________.

A) Its callable provision
B) The fact that it adjusts with inflation
C) The potential for the bond to split,thus doubling your value
D) The potential conversion of the bond into equity as well as the cash flow from the coupon payments

Answer 1

The potential conversion of the bond into equity as well as the cash flow from the coupon payments

Question 2

If you buy a corporate bond for $50,000 with an interest rate of 10% and hold it to its maturity date in 10 years,what interest payment amount will you receive every 6 months?

A) $500
B) $2,500
C) $5,000
D) Nothing is paid out until bond maturity

Answer 2

$2,500

Question 3

Selling a bond at a discount is _________________.

A) Selling the bond for more than face value
B) Selling the bond for less than face value
C) Selling the bond for face value
D) Lowering the interest rate on the bond

Answer 3

Selling the bond for less than face value

Question 4

If you were to buy a municipal bond for $20,000 with an interest rate of 2% and hold it to its maturity date in 10 years,how often would you receive an interest payment?

A) Monthly
B) Every six months
C) Once a year
D) At 10 years

Question 5

Bond call provisions allow the bond issuer to _________________ than the current interest rates.

A) Sell back the bond before the maturity date,if the coupon rates are lower
B) Sell back the bond before the maturity date,if the coupon rates are higher
C) Buy back the bond before the maturity date,if the coupon rates are lower
D) Buy back the bond before the maturity date,if the coupon rates are higher

Question 6

A(n)_________________ is a debt instrument issued by governments and companies for the purpose of raising money to fund construction,take on new projects,or grow business.

A) Stock
B) Bond
C) Coupon
D) Equity

Question 7

U.S.savings bonds differ from other bonds in that _________________.

A) The interest is accrued and paid out at maturity rather than twice a year as income
B) You can only buy them through your employer or bank
C) The interest is free of both federal and state tax
D) There are no differences

Question 8

_________________ are marketable securities whose principal is adjusted by changes in the consumer price index to protect them against inflation; as such,their principal increases with inflation or decreases with deflation.

A) Corporate bonds
B) Municipal bonds
C) TIPS
D) Treasury bills

Question 9

Which is not a debt obligation that the U.S.Treasury issues?

A) U.S.savings bonds
B) U.S.Treasury stock
C) Treasury bills,notes,and bonds
D) Treasury Inflation-Protected Securities (TIPS)

Question 10

How is interest taxed on U.S.Treasury-issued bonds?

A) Interest is taxable by the state but not the local government
B) Interest is taxable by the state and the local government
C) Interest is not taxable by the state but can be taxed by the local government
D) Interest is not taxable by the state or the local government

Question 11

Municipal bonds are:

A) Generally taxable by federal and most state and local taxes
B) Generally taxable by federal taxes but exempt from most state and local taxes
C) Generally exempt from federal taxes and most state and local taxes
D) Generally exempt from federal taxes but taxable by state and local governments

Question 12

Selling a bond at a premium is _________________.

A) Selling the bond for more than face value
B) Selling the bond for less than face value
C) Selling the bond for face value
D) Increasing the interest rate on the bond

Question 13

If you buy a municipal bond for $10,000 with an interest rate of 5% and hold it to its maturity date in 10 years,what amount will you receive back in 10 years?

A) $10,000
B) $10,500
C) $15,000
D) $15,500

Question 14

What is the inverse relationship between bond prices and interest rates?

A) When interest rates go up,bond prices fall; when interest rates go down,bond prices increase
B) When interest rates go down,bond prices fall; when interest rates go up,bond prices increase
C) When interest rates go up,bond prices increase; when interest rates go down,bond prices increase
D) There is no inverse relationship between bond prices and interest rates

Question 15

As a bondholder,you _________________.

A) Are lending money to a corporation or government entity
B) Are a part owner of the corporation
C) Have no risk in losing your money
D) Can only receive your principal investment when the bond matures

Question 16

Bonds with a call feature _________________.

A) Have a phone number on them where you can check the value of the bond
B) Allow the issuer buy back the bond before its maturity date
C) Are locked in at the current interest rate
D) Can be stored electronically on a cell phone

Question 17

The closer a bond comes to reaching its maturity date,_________________.

A) The more impact changes in interest rates will have on its value
B) The more interest rates will align with the bond's value
C) The closer it will be to its par value
D) All options are true

Question 18

If you need to sell a bond on the secondary market before the maturity date,_________________.

A) You will receive only the exact amount you invested
B) You will receive less than face value if current interest rates are higher than your bond
C) You will receive more than face value if current interest rates are higher than your bond
D) You will receive less than face value if current interest rates are lower than your bond

Question 19

_________________ are short-term government securities with maturities of 52 weeks or less.

A) Corporate bonds
B) Municipal bonds
C) TIPS
D) Treasury bills

Question 20

What is a bond coupon?

A) A discount for buying bonds
B) A method for purchasing bonds
C) The interest payment of a bond
D) The principal payment of a bond

Question 21

Treasury bills _________________.

A) Pay interest semiannually
B) Pay interest monthly
C) Are typically issued at a discount from the face amount
D) Are issued for greater than 10 years

Question 22

What is the yield to maturity (YTM)on a bond that sells for $950,has a coupon rate of 7%,matures in five years,and has a par value of $1,000?

A) 7%
B) 8.24%
C) 9.5%
D) 10.7%

Question 23

High-yield bonds (also known as _________________ bonds)are corporate bonds that are issued by organizations that do not qualify for "investment-grade" ratings.

A) Convertible
B) Jewel
C) Junk
D) Lottery

Question 24

Convertible bonds are corporate bonds _________________.

A) That can be converted to common stock
B) That can be called early by the issuer
C) That can be converted to the present interest rate
D) That do not pay interest but issue common stock

Question 25

If a corporation goes into bankruptcy,_________________.

A) Subordinate bondholders get paid before senior bondholders
B) Senior bondholders get paid before subordinate bondholders
C) Bondholders are the last to get paid
D) Bondholders are the first to get paid

Question 26

_________________ is the interest rate you will receive if you buy a bond today and hold it to maturity,including all payouts,coupons,and capital gains or losses.

A) Coupon yield (rate)
B) Dividend yield (rate)
C) Investment yield (rate)
D) Yield to maturity

Question 27

_________________ is the interest rate paid on the bond as a percentage of the bond's current market price.

A) Coupon yield (rate)
B) Dividend yield (rate)
C) Investment yield (rate)
D) Yield to maturity

Question 28

_________________ are debt securities issued by a state,municipality,or county to finance capital expenditures.

A) Corporate bonds
B) Municipal bonds
C) TIPS
D) Treasury bills

Question 29

The present value of a bond is calculated by discounting the future _________________ to be received from the bond.

A) Coupon payments
B) Principal payment
C) Cash flows (coupon payments and principal payment)
D) Interest

Question 30

Bond rating agencies classify bonds based on the _________________.

A) Creditworthiness of the issuer
B) Potential for growth and success of the issuer
C) Personal guarantee of the corporate officers and board of directors
D) Stock value of the corporation

Question 31

A _________________ bond is a hybrid security with features of both debt and equity.

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

Question 32

Municipal bonds _________________.

A) Have no default risk
B) Have tax advantages
C) Are issued by the federal government
D) Are repaid by the revenue generated by the project they have been used to fund

Question 33

Which is not one of the three biggest credit rating companies for those issuing bonds?

A) Bloomberg
B) Fitch
C) Moody's
D) Standard & Poor's

Question 34

Series EE U.S.savings bonds differ from most other bonds in that _________________.

A) Interest is paid out quarterly
B) Interest is paid out semiannually
C) Interest is paid out monthly
D) Interest accrues and is paid out at maturity

Question 35

Junk bonds or high-yield bonds _________________.

A) Are investment-grade bonds
B) Are bad investments that should be avoided
C) Are classified by bond rating agencies as BB,BA,or lower
D) Have a guaranteed return

Question 36

Treasury notes _________________.

A) Can be purchased only through a competitive bid
B) Can be purchased only through a noncompetitive bid
C) Can be purchased only through Treasury Direct
D) Pay interest that is exempt from state and local income taxes

Question 37

TIPS _________________.

A) Offer an interest rate that is adjusted by changes in the consumer price index
B) Include principal that is adjusted by changes in the consumer price index
C) Have to be held to maturity
D) Pay interest monthly

Question 38

Corporate bonds _________________.

A) Have default risk
B) Have tax advantages
C) Are issued by the federal government
D) Provide ownership in the corporation

Question 39

_________________ are debt obligations issued by private and public corporations.

A) Corporate bonds
B) Municipal bonds
C) TIPS
D) Treasury bills

Question 40

A bond credit rating assesses the _________________ of a government's or corporation's debt issues.

A) creditworthiness
B) Principal
C) Interest rate
D) Value

Question 41

The tax advantage of corporate bonds is that there is _________________.

A) No federal income tax on the interest and capital gains earned
B) No state income tax on the interest and capital gains earned
C) No federal or state income tax on the interest and capital gains earned
D) None of the choices are correct; there is no tax advantage for corporate bonds

Question 42

_________________ protects against interest rate risk by buying bills,notes,and bonds that mature in different years.

A) Bestriding
B) Laddering
C) Spanning
D) Straddling

Question 43

If interest rates are expected to decline,invest heavier in _________________.

A) Long-term bonds whose prices will increase the most with the fall of interest rates
B) Short-term bonds whose prices will increase the most with the fall of interest rates
C) Short-term bonds whose prices will increase the least with the rise of interest rates
D) Nothing; hang on to your cash

Question 44

If you expect interest rates to go up,buy _________________.

A) Long-term bonds
B) Short-term bonds
C) Intermediate-term bonds
D) Bond mutual funds

Question 45

_________________ is (are)a good alternative if a small investment makes it difficult to invest in a diversified portfolio of bonds.

A) Penny bonds
B) Junk bonds
C) A bond mutual fund
D) Stock

Question 46

U.S.Treasury bonds can be bought _________________.

A) At www.TreasuryDirect.gov
B) At most local financial institutions
C) Through payroll deductions
D) All options are correct

Question 47

The value of a bond is determined by _________________.

A) Calculating the present value of the future cash flows
B) Calculating the future value of future cash flows
C) Calculating the return for a similar risk investment
D) Discounting present cash value to determine future value

Question 48

Which is not a risk associated with bonds?

A) Call risk
B) Default risk
C) Interest-rate risk
D) Recession risk

Question 49

When looking to invest in bonds,first _________________.

A) Know your investment objective
B) Look at the return on U.S.Treasuries to determine the risk-free rate
C) Ask a broker/dealer/financial planner what to buy
D) Study a bond screener to find a bond you would like to buy

Question 50

Which of the following is not one of the advantages of bond mutual funds?

A) Immediate diversification of the bond portfolio
B) Having a professional fund manager evaluate which bonds to buy and sell
C) Having to pay for the professional fund manager and other expenses in the expense ratio,thus lowering yield
D) Diversification of risk,as the investment is spread among government,corporate,and mortgage-backed bonds

Question 51

Building a bond ladder is the process of buying bills,notes,and bonds that mature _________________.

A) At different rates
B) In different years
C) In your later years
D) In synchronization

Question 52

Diversification is important in your bond portfolio because it _________________.

A) Reduces the effect of default risk
B) Keeps you from getting bored with your investments
C) Spreads your wealth
D) None of the choices are correct; diversification within your bond portfolio is not important

Question 53

Bond mutual funds _________________.

A) Provide immediate bond diversification
B) Have a professional fund manager who evaluates which bonds to buy and sell
C) Have management fees associated with them
D) All options are correct

Question 54

Corporate bonds can be purchased through a _________________.

A) Full-service broker
B) Discount broker
C) Online broker
D) All options are correct

Question 55

Bonds are known as _________________ because they pay a fixed amount of cash interest.

A) Dependable
B) Fixed
C) Fixed-income securities
D) Safe

Question 56

A bond ladder _________________.

A) Helps reduce the risk of interest rates changes by spacing out the maturities
B) Refers to monthly contributions into a bond mutual fund
C) Guarantees that you will always get the best interest rates on the bonds you invest in
D) Is a strategy that helps you achieve your financial goals by "climbing the ladder"

Question 57

If you had $10,000 to invest in bonds and your intent was to ladder the bond investments at segments of $1,000 every year,for what period of time would each bond be set?

A) each $1,000 would purchase a 10-year bond,one per year,for the next ten years
B) each year,$10,000 would purchase a single 1-year bond
C) purchase one 10-year bond for $10,000
D) each $1,000 would purchase a 1-year bond,one per year,for the next ten years

Question 58

www.TreasuryDirect.gov is _________________.

A) Only for major investors who can buy U.S.government bonds
B) The only place to buy Treasury bills,notes,and bonds
C) Too complicated for the common person to understand
D) Where anyone can go to purchase EE-Bonds,I-Bonds,and Treasury bills,notes,and bonds

Question 59

The higher the rating on the bond,the _________________.

A) Higher the interest rate the issuer has to pay
B) Higher the risk of default on the bond
C) Lower the risk of default on the bond
D) None of the choices are correct; the rating has no effect on the interest rate and does not rate the risk of a bond

Question 60

If you were to buy a $10,000 Treasury note on a noncompetitive bid that matures in seven years at 5% interest,what would the interest payments be and how often would you receive interest?

A) $250 every 6 months
B) $500 every 6 months
C) $3,500 at 7 years
D) $50 a month

Question 61

As an investor,you should want to purchase bonds with a call feature only if the bonds offer a slightly higher return than similar bonds without a call feature,which compensates you for the call risk.

Question 62

Buying and selling corporate bonds is as easy as buying and selling stocks,given that bonds tend to trade every few days and there are fewer buyers and sellers.

Question 63

Some bonds are traded on stock exchanges or in the over-the-counter market.

Question 64

Explain why investments in corporate bonds do not have as favorable tax advantages as investments in Treasuries or municipal bonds.

Question 65

Which of the following statements is true?

A) It is easier for individuals to buy and sell corporate bonds
B) It is easier for individuals to buy and sell government bonds
C) All bond transactions should be handled through an investment advisor
D) Bonds are too complicated for an individual to buy on his or her own

Question 66

Bond values can be derived by evaluating their yield,yield to maturity,call risk,yield to call,and coupon yield.

Question 67

Convertible bonds typically have low coupon rates but are of additional value through the option to convert the bond to stock and thereby participate in further growth in the company's equity value.

Question 68

When TIPS mature,you are paid the adjusted principal or original principal,whichever is greater.

Question 69

Because bonds are repaid or redeemed on their maturity date,they are considered safer than stock as a stock purchase is never "repaid."

Question 70

Bondholders can force a company into bankruptcy if the company does not pay the interest as promised and,in the case of bankruptcy,bondholders have a priority claim on an issuer's income over that of a shareholder.

Question 71

For convertible corporate bonds,the company pays the bondholder back in dollars when the bond is converted.

Question 72

Explain some of the benefits of buying bonds.

Question 73

Laddering does not reduce interest rate risk as it involves bonds coming due at different times.