Deck 6: Bond Markets

Question 1

The dirty price plus accrued interest is called the clean price of the security.

Answer 1

False

Question 2

A T-Bond with a $1000 par is quoted at 97:14 Bid, 97:15 Ask. The clean price for you to buy this bond is

A) $974.38.
B) $975.42.
C) $974.69.
D) $975.77.
E) none of the above.

Answer 2

C

Question 3

Callable bonds have lower required yields than similar convertible bonds, ceteris paribus.

Answer 3

False

Question 4

TIPS are a Treasury offering that protects investors from unexpected increases in inflation.

Question 5

The quoted ask yield on a 14 year $1000 par T-Bond with a 7% semiannual payment coupon and a price quote of 98:15 is

A) 7.00%.
B) 7.18%.
C) 7.30%.
D) 3.59%.
E) 3.63%. $984.688 = $35* PVIFA (r%, 28) + $1,000 * PVIF (r%, 28 yrs)

Question 6

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.

Question 7

In a Treasury bond quote with a $1000 face value, you find the bid is equal to 100:24 and the ask is equal to 100:26. You could buy this bond for $1008.125.

Question 8

An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture.

Question 9

"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.

Question 10

An 18 year T-Bond can be stripped into how many separate securities?

A) 18
B) 19
C) 36
D) 37
E) 38

Question 11

Treasury notes and bonds and municipal bonds are default risk free.

Question 12

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.

Question 13

Accrued interest owed to the bond seller increases as the next coupon payment date approaches.

Question 14

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

Question 15

Bond ratings use a classification system to give investors an idea of the amount of default rate risk associated with the bond issue.

Question 16

You buy a principal STRIP maturing in 5 years. The price quote per hundred of par for the strip is 75.75%. Using semiannual compounding what is the promised yield to maturity on the STRIP?

A) 5.632%
B) 5.712%
C) 2.816%
D) 2.945%
E) 4.566% [(100/75.75)^(1/(5x2)) - 1] x 2 = 5.632%

Question 17

Eurobonds are bonds denominated in the issuer's home currency, but are issued outside their home country.

Question 18

Revenue bonds are backed by the full revenue of the municipality.

Question 19

T-notes and T-bonds are issued in minimum denominations of $1,000 or multiples of $1,000.

Question 20

A life insurer owes $550,000 in 8 years. To fund this outflow the insurer wishes to buy strips that mature in 8 years. The strips have a $5,000 face value per strip and pay a 6% APR with semiannual compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)?

A) $110,000
B) $342,742
C) $355,224
D) $362,355
E) $370,890 (5000/1.03¹⁶) * (550,000/5000)

Question 21

On September 1, 2012 an investor purchases a $10,000 par T-Bond that matures in 12 years. The coupon rate is 6% and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7%. The dirty price of the bond is:

A) $9,295.45.
B) $9,300.55.
C) $9,313.75.
D) $9,321.82.
E) $9,333.24. 300 x PVIFA (3.5%, 24) + 10,000 x PVIF (3.5%, 24) = 9,197.08; 300*(70/180) = 116.67; 9,197.08 + 116.67 = 9,313.75

Question 22

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?

A) AAA-rated noncallable corporate bond with a sinking fund
B) AA-rated callable corporate bond with a sinking fund
C) AAA-rated callable corporate bond with a sinking fund
D) High-quality municipal bond
E) AA-rated callable corporate bond without a sinking fund

Question 23

Which of the following statements about Euro bonds is/are true?
I) The issuer chooses the currency of denomination.
II) Spreads on firm commitment offers are lower for Euro bonds than for U.S. bonds.
III) Euro bonds typically have denomination of $5,000 and $10,000.
IV) Euro bonds are bearer bonds.

A) I and II only
B) I, III, and IV only
C) II, III, and IV only
D) II and III only
E) I, II, III, and IV are true

Question 24

A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25 shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price have to rise to make conversion potentially attractive?

A) 10.00%
B) 14.73%
C) 22.22%
D) 23.64%
E) 25.69% [(1100/25)/36] - 1

Question 25

A T-Bond with a $10,000 par is quoted at a bid of 92:11 and an ask of 92:17. If you bought the bond and then immediately sold it at the same quotes, how much money would you gain or lose (ignore commissions)?

A) $12.50
B) -$12.50
C) -$18.75
D) $18.75
E) $0.00 9,234.38 - 9,253.13 = -18.75

Question 26

The quoted ask yield on a 30-year $1000 par T-Bond with a 6.25% coupon and a price quote of 106:16 is ___________ (use semiannual compounding).

A) 2.94%
B) 2.90%
C) 5.79%
D) 5.87%
E) 4.95% $1,065.00 = $31.25* PVIFA (r%, 60) + $1,000 * PVIF (r%, 60 yrs); trial and error or financial calculator for r

Question 27

On July 1, 2012 you purchase a $10,000 par T-Note that matures in 5 years. The coupon rate is 8% and the price quote is 98:6. The last coupon payment was May 1, 2012 and the next payment is November 1, 2012 (184 days total). The accrued interest is

A) $132.61.
B) $101.00.
C) $50.54.
D) $40.65.
E) $35.67. ((8%/2) x 10,000) x (61 days since last coupon/184) = $132.61

Question 28

Which of the following is/are true about callable bonds?
I) Must always be called at par
II) Will normally be called after interest rates drop
III) Can be called by either the bondholder or the bond issuer
IV) Have higher required returns than noncallable bonds

A) I and II only
B) II and IV only
C) II and III only
D) I, II, and III only
E) I, II, III, and IV are true

Question 29

SEC Rule 144 A does which of the following?

A) Allows privately placed investments to be traded on a limited basis
B) Allows bond issuers to call their bonds when desired
C) Determines the limits of responsibility of bond covenants
D) Requires that bonds traded on the NYSE bond market utilize the ABS system
E) None of the above

Question 30

When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a

A) rights offering.
B) private placement.
C) firm commitment.
D) best efforts.
E) standby offering.

Question 31

The largest type of municipal bonds outstanding are _______________.

A) revenue bonds
B) industrial development bonds
C) Treasury STRIPS
D) convertible bonds
E) general obligation bonds

Question 32

The ask yield on a 6% coupon Treasury bond maturing in 8 years is 5.488%. If the face value is $1000, what should be the QUOTED cost of the bond today (use semiannual compounding)?

A) 103:6
B) 103:7
C) 103:8
D) 103:9
E) 103:10 $60 x PVIFA (0.05488/2, 16) + $1,000 x PVIF (0.05488/2,16) = $1,032.79488;
To convert to fraction quote do the following: Round down ($1,032.79488/10) +
Round {($1,032.79488/10) - Round down ($1,032.79488/10)] x 32} = 103 9/32

Question 33

An investor is in the 28% federal tax bracket, pays a 9% state tax rate and 4% in local income taxes. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying _____ interest.

A) 11.79%
B) 10.17%
C) 9.08%
D) 9.68%
E) 8.47% 0.06/[1 - (0.28 + 0.09 + 0.04)]

Question 34

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.

A) exempt from federal taxes; exempt from all taxes
B) taxable at the state level only; exempt from state taxes only
C) taxable at federal level only; exempt from federal taxes
D) taxable at the state level; taxed at the federal level
E) totally tax exempt; exempt from state taxes

Question 35

Bearer bonds are bonds

A) with coupons attached that are redeemable by whoever has the bond.
B) where the registered owner automatically receives bond payments when scheduled.
C) in which the issue matures on a series of dates.
D) issued in another currency other than the bond issuer's home currency.
E) issued in a different country other than the bond issuer's home country.

Question 36

With respect to private placements of bonds, which of the following is correct?
I) Issuers of privately placed bonds tend to be less well known than public bond issues.
II) Interest rates on privately placed debt tend to be higher than for similar public issues.
III) Purchasers of privately placed debt have assets of at least $100 million.
IV) Once bonds have been privately placed, the original buyers must hold the bonds until maturity.

A) I only
B) I and III only
C) I, II, and III only
D) I, III, and IV only
E) I, II, III, and IV

Question 37

A T-Bond with a $1000 par is quoted at a bid of 105:7 and an ask of 105:9. If you sell the bond you will receive

A) $1,052.81.
B) $1,052.19.
C) $1,057.22.
D) $1,059.22.
E) none of the above.

Question 38

An investor is trying to decide between a muni paying 5.75% or an equivalent taxable corporate paying 8.25%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond?

A) 80.00%
B) 20.00%
C) 25.00%
D) 66.67%
E) 30.00% 1 - (0.0575/0.0825)

Question 39

Convertible bonds are
I) options attached to bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond.
II) bonds in which the issue matures (converts) a little each year.
III) bonds collateralized with certain types of automobiles.
IV) bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.

A) I only
B) I and II only
C) I, II, and III
D) IV only
E) I and III only

Question 40

Standard revenue bonds are

A) backed by the full taxing authority of the municipality.
B) collateralized by the earnings from a specific project.
C) bonds backed by mortgages.
D) backed by the U.S. Treasury.
E) always offered with a best efforts offering.

Question 41

You find the following quote for a corporate bond ($1,000 par, pays interest semiannually):

Question 42

An investor buys a $10,000 par, 4.25% annual coupon TIPS security with 3 years to maturity. If inflation every six months over the investor's holding period is 2.50%, what is the final payment the TIPS investor will receive?

A) $10,213.00
B) $10,869.28
C) $11,822.25
D) $11,843.37
E) $12,201.11 ($10,000 * 1.025⁶) *(1 + (0.0425/2))

Question 43

You are an investment banker and one of your large U.S. corporate clients has come to you asking for help deciding on the best market in which to place a sizeable issue of bonds. You could try to issue dollar-denominated bonds, or Euro or yen-denominated bonds. You could also issue in the United States or overseas. What major factors should you consider in advising your client on where to market the issue?

Question 44

A municipal bond holder buys a 5% coupon annual payment muni bond at a price of $4,900. The bond has a $5,000 face value. In one year she sells the bond for $4,975. The appropriate capital gains tax rate is 15% and her ordinary income tax rate is 28%. What is her after-tax rate of return?

Question 45

You purchased a five-year annual payment 6% coupon bond for $1,000 and you planned on holding it to maturity. However right after you bought the bond it was called at $1,043.29 when all interest rates fell to 5% and remained there for the full five years. You reinvested the money for the full five years. What was your annual compound rate of return off your original investment?

A) 6.00%
B) 5.89%
C) 5.75%
D) 5.23%
E) 5.00% [(1,043.29 x 1.05⁵)/1,000]^1/5 - 1

Question 46

What is the difference between General Obligation and Revenue bonds?
G.O.s are backed by the full revenue stream of the municipality (often called the General Fund). They typically require voter approval. Revenue bonds are backed by a specific project's revenues, but not the general tax revenues of the municipality. Revenue bonds are thus riskier than
G.O.s.

Question 47

The total sale proceeds from selling the stripped components of a Treasury security can sometimes be greater than the fair present value of the Treasury security. Why might this happen?

Question 48

A bondholder purchased a 9% coupon, $1,000 par 3-year bond at a 9% yield. Interest rates then immediately fell to 7% and his bond was called at a price of $1,040. He reinvested his money and earned 7% on the $1,040 for 3 years. Did the call help or hurt the bondholder? What was his 3-year rate of return on his original investment?

Question 49

What ratings comprise investment-grade bonds and what ratings are used for junk bonds? What are the primary differences between the two? In particular, why are investment-grade bonds more marketable and why are junk bonds issued at all?

Question 50

An investor is holding a $1,000 par, 10-year 9% coupon convertible bond with a 9% required bond yield. The bond is convertible into 40 shares of stock. Each share is worth $30. The bond has a current market value of $1,200. If interest rates don't change what is the maximum gain and loss on the bond?

Question 51

You are considering purchasing 5-year corporate bonds as an investment. You have a choice of terms available. Which of the following terms would you find desirable, ceteris paribus? How does each feature affect the bond's required rate of return? Explain.
a) call feature
b) convertible feature
c) warrants
d) sinking fund
e) debenture

Question 52

A bond investor has a 99% chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond, but only a 98% chance in the second year, and a 97% chance in the third year and beyond. What is the cumulative default probability over the first three years she holds the bond?

A) 3.75%
B) 4.24%
C) 5.89%
D) 6.85%
E) 7.33% 1 - [0.99 * 0.98 * 0.97] = 5.89%

Question 53

You purchase a $1000 face value convertible bond for $975. The bond can be converted into 150 shares of stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert?

A) $4.50
B) $5.26
C) $6.50
D) $7.10
E) $7.25 (975/150) = 6.50