Question 1

A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date.

Accepted Answer

A callable bond gives the issuer the option to retire the bond before maturity at a specific price after a specific date.

Question 2

A convertible bond has a par value of $1,000 but its current market price is $975.The current price of the issuing company's stock is $26 and the conversion ratio is 34 shares.The bond's market conversion value is _________.

Accepted Answer

($26)(34) = $884

Question 3

The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds.

Accepted Answer

The term "pay in kind" refers to when the issuer of a bond has the option to pay interest in the form of additional bonds instead of cash. Therefore, the correct answer is D - pay in kind bonds. Options A, B, and C do not have the same feature of allowing interest payments in the form of additional bonds.

Question 4

Consider the liquidity preference theory of the term structure of interest rates.On average,one would expect investors to require _________.

Accepted Answer

According to the liquidity preference theory, investors demand a higher yield on long-term bonds than short-term bonds because of greater uncertainty and risk associated with investing over a longer period of time. This is known as the liquidity premium. Therefore, option B is the correct choice.

Question 5

Which one of the following statements is correct?

Accepted Answer

Accrued interest represents the amount of interest that has accumulated on a bond since the last coupon payment, but has not yet been paid to the bondholder. The invoice price of a bond is the price that the buyer of the bond must pay to receive the bond, including any accrued interest. Therefore, the invoice price is equal to the flat price (the price of the bond without any accrued interest) plus the accrued interest. Therefore, the correct statement is Invoice price = Flat price + Accrued Interest.

Question 6

Consider two bonds,A and B.Both bonds presently are selling at their par value of $1,000.Each pay interest of $120 annually.Bond A will mature in 5 years while bond B will mature in 6 years.If the yields to maturity on the two bonds change from 12% to 14%,_________.

Accepted Answer

When yields increase, bond prices decrease. Longer maturity bonds (Bond B) are more sensitive to interest rate changes, so Bond B will decrease more in value than Bond A.

Question 7

A convertible bond has a par value of $1,000 but its current market price is $950.The current price of the issuing company's stock is $19 and the conversion ratio is 40 shares.The bond's conversion premium is _________.

Accepted Answer

To calculate the conversion premium, we first need to determine the bond's conversion value, which is the market price of the stock multiplied by the conversion ratio. In this case, the conversion value is:
$19 x 40 = $760

Then, we divide the bond's market price ($950) by the conversion value ($760) and subtract 1 to get the conversion premium:
($950 / $760) - 1 = 0.25
0.25 x 100% = 25%

Therefore, the conversion premium is $190.00.

Question 8

Bonds rated _____ or better by Standard and Poor's are considered investment grade.

Accepted Answer

Bonds rated BBB or better by Standard and Poor's are considered investment grade, indicating lower risk of default.

Question 9

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Accepted Answer

Catastrophe bonds are specifically designed to transfer the risk of major natural catastrophes, such as hurricanes or earthquakes, from an insurance company to capital markets. Investors provide capital to the bonds and receive high yields, but risk losing their investment if the specified disaster occurs. This allows insurance companies to obtain coverage against these high-impact events and diversify their risk.

Question 10

Everything else equal _________ bonds will require a higher promised YTM than ________ bonds.

Accepted Answer

Catastrophe bonds are riskier than standard bonds because they are linked to specific events like natural disasters, so they require a higher promised yield to maturity (YTM) to compensate for the increased risk.

Question 11

In an era of particularly low interest rates,which of the following bonds is most likely to be called?

Accepted Answer

Coupon bonds selling at a premium are most likely to be called in a low-interest-rate environment because the issuer can save money by redeeming the bonds at a premium instead of paying the higher interest payments on the outstanding bonds.

Question 12

The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's.The "C" rating indicates the bonds are _________.

Accepted Answer

A "C" rating by Moody's indicates that the bonds are considered to be junk bonds, which are high-risk investments with a high probability of default.

Question 13

Serial bonds are associated with _________.

Accepted Answer

Serial bonds are a type of bond that has staggered maturity dates. This means that different parts of the bond will mature at different times, allowing the issuer to avoid having to pay back the entire bond principal all at once. Serial bonds are often used for large projects with long-term financing needs, such as infrastructure projects or real estate developments. They are also commonly used by governments to fund large-scale initiatives, such as infrastructure improvements or new public programs.

Question 14

A coupon bond which pays interest of $60 annually,has a par value of $1,000,matures in 5 years,and is selling today at a $84.52 discount from par value.The approximate yield to maturity on this bond is _________.

Accepted Answer

To find the yield to maturity on the bond, we need to use the formula for yield to maturity:

YTM = (Annual interest payment + (Par value - Purchase price) / Number of years to maturity) / ((Par value + Purchase price) / 2)

Plug in the values given:

YTM = (60 + (1000 - 915.48) / 5) / ((1000 + 915.48) / 2)

YTM = 8%

Therefore, the approximate yield to maturity on this bond is 8%.

Question 15

Consider the expectations theory of the term structure of interest rates.If the yield curve is downward sloping,this indicates that investors expect short-term interest rates to __________ in the future.

Accepted Answer

According to the expectations theory, if the yield curve is downward sloping, it implies that investors expect short-term interest rates to decrease in the future. This is because the yield curve reflects market expectations about future interest rates, with longer-term rates being influenced by expectations of future short-term rates.

Question 16

A coupon bond which pays interest of 4% annually,has a par value of $1,000,matures in 5 years,and is selling today at $785.The actual yield to maturity on this bond is _________.

Accepted Answer

The answer of A coupon bond which pays interest of...

Question 17

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Accepted Answer

The sinking fund provision is designed to ease the burden of principal repayment by requiring the borrower to make periodic contributions to a separate fund that is used to retire a portion of the bond issue. This spreads out the repayment of principal over several years and reduces the risk of default for investors.

Question 18

Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes.

Accepted Answer

Bonds with longer maturities and lower coupons are more sensitive to interest rate changes because they have longer durations, meaning it takes more time for the investor to receive the bond's payments, making them more susceptible to interest rate fluctuations.

Question 19

A coupon bond which pays interest of $60 annually,has a par value of $1,000,matures in 5 years,and is selling today at a $75.25 discount from par value.The current yield on this bond is _________.

Accepted Answer

To calculate the current yield:

Annual interest payment / Market price of bond = Current yield

Annual interest payment = $60

Market price of bond = Par value - discount = $1,000 - $75.25 = $924.75

$60 / $924.75 = 0.0649 or 6.49%

Therefore, the current yield on this bond is 6.49%.

Question 20

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

Accepted Answer

Bonds with coupon rates that fall when the general level of interest rates rise are called inverse floaters.

Quiz 10: Bond Prices and Yields