Deck 13: The Bond Marketprivate

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Mortgage bonds are secured by property.

Question 7

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

Question 8

The indenture specifies the terms of a bond.

Question 9

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

Question 10

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

Question 11

Debentures are bonds that secured by equipment.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Bonds pay a flow of income called "interest."

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

A zero coupon only pays interest when it is sold.

Question 23

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

Question 24

Euro-bonds are denominated in dollars.

Question 25

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

Question 26

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

Question 27

A firm may not repurchase bonds at a discount.

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

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

Question 35

Split coupon bonds offer investors special tax advantages.

Question 36

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

Question 37

The term of an extendible bond is known with certainty.

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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

Question 43

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 44

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 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 the above

Question 46

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

Question 47

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 48

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 49

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 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

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

Question 52

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 53

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 54

Virtually all bonds have each of the following except

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

Question 55

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 56

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 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

In general, income bonds are less risky than

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

Question 59

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 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

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 62

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