Question 1

Which is not used to identify a bond?
A) issuer
B) yield to maturity
C) coupon
D) maturity

Accepted Answer

B

Question 2

To find details about a specific bond, one would refer to a legal document known as the
A) debenture.
B) trust certificate.
C) financial newspaper.
D) indenture.

Accepted Answer

The indenture is the legal document that outlines the terms, conditions, and specifics of a bond, including its interest rate, maturity date, and issuer's obligations.

Question 3

A city wishing to build a new toll bridge across a river would most likely issue a(n)
A) mortgage.
B) assessment bond.
C) revenue bond.
D) sinking fund.

Accepted Answer

A city would most likely issue a revenue bond to finance the construction of a new toll bridge. Revenue bonds are a type of municipal bond that is secured by the revenue generated from the project it finances, such as tolls from a bridge.

Question 4

A sinking fund is
A) setting aside a portion of the principal each year.
B) money invested poorly.
C) a low-interest investment.
D) a bond that decreases in value until maturity.

Accepted Answer

A sinking fund is a strategy where a company or individual sets aside money over time to pay off a debt or upcoming expense. It involves saving a portion of the principal regularly to ensure the future liability can be met. This method is often used to repay bonds or loans systematically, ensuring that the full amount is available when due.

Question 5

Interest only, sinking fund, and balloon are
A) types of repayment.
B) types of maturities.
C) investment strategies.
D) types of stock.

Accepted Answer

Interest only, sinking fund, and balloon are types of repayment methods used in finance, particularly in the context of loans and bonds. Interest-only payments involve paying only the interest on the principal balance, with the principal amount remaining unchanged. A sinking fund is a method where a borrower sets aside funds over time to repay the debt in the future. A balloon payment involves paying off the principal balance or a large portion of the balance in a lump sum at the end of the loan term.

Question 6

An annuity promises a_____ amount of money on a periodic schedule for a _____ amount of time.
A) fixed, fixed
B) fixed, variable
C) variable, fixed
D) variable, variable

Accepted Answer

An annuity typically involves payments of a fixed amount of money at regular intervals over a specified period of time, hence "fixed, fixed" is the correct description.

Question 7

Upon maturity of a zero coupon bond, the owner receives
A) the entire interest amount.
B) the principal.
C) the interest earned over its life.
D) nothing; payments for a zero coupon bond are periodic.

Accepted Answer

Zero coupon bonds do not pay periodic interest. Instead, they are sold at a discount to their face value, and upon maturity, the owner receives the face value of the bond, which represents the principal amount.

Question 8

All new debt now issued by the U.S. Treasury is in_____ form.
A) bearer
B) coupon
C) zero-coupon
D) book entry

Accepted Answer

All new debt issued by the U.S. Treasury is in book entry form, meaning that there are no physical certificates for the securities. Instead, ownership is recorded electronically.

Question 9

A $1,000 par bond with a closing price of 107 in the financial press has a dollar price of
A) $107.00.
B) $1,070.00.
C) $1,700.00.
D) $10,700.

Accepted Answer

The closing price of 107 means the bond is trading at 107% of its par value. Therefore, a $1,000 par bond at 107% of its value is $1,070.

Question 10

A volume of 59 in the financial press for bonds means how much par value traded?
A) 59
B) 590
C) 5,900
D) 59,000

Accepted Answer

In the financial press, a volume of 59 for bonds typically means $59,000 of par value traded. Bond volumes are often reported in thousands.

Question 11

A bond with PEP 7.5s00 as its identifier
A) is a zero-coupon bond.
B) has a 7.5% yield to maturity.
C) expires 7.5 years from purchase.
D) has a 7.5% coupon.

Accepted Answer

The identifier "7.5s" in a bond's name typically indicates the bond has a 7.5% coupon rate, meaning it pays 7.5% of its face value in interest each year.

Question 12

You see the following in the financial papers that a bond closed at 120, down 1/4. The previous closing price was
A) $120.25.
B) $1,202.50.
C) $122.50.
D) $1200.25.

Accepted Answer

The answer of You see the following in the financial...

Question 13

Which is better to own during a period of declining interest rates in terms of reinvestment rate risk?
A) a zero coupon bond
B) a bond with a 13% coupon
C) a bond with a variable interest rate
D) a municipal bond

Accepted Answer

A zero coupon bond is better to own during a period of declining interest rates in terms of reinvestment rate risk because it does not pay periodic interest, eliminating the need to reinvest at potentially lower rates.

Question 14

Bonds rated below _____ are known as junk bonds.
A) BBB
B) BB
C) B
D) CCC

Accepted Answer

Bonds rated below BBB are considered junk bonds.

Question 15

Bonds that can be exchanged for common stock are said to be
A) callable.
B) transferable.
C) convertible.
D) discount.

Accepted Answer

Bonds that can be exchanged for common stock are known as convertible bonds. This feature allows bondholders to convert their bonds into a predetermined number of shares of the issuing company's common stock.

Question 16

With a consol, a level rate of interest is paid
A) until the end of the recession.
B) weekly.
C) to a charity of the bondholder's choosing.
D) forever.

Accepted Answer

A consol is a type of bond that pays an annual interest rate forever, without a maturity date, meaning the principal is never repaid and interest payments continue indefinitely.

Question 17

A 7 1/2 % coupon semi-annual payment bond selling for $950 will pay how much to the holder at maturity?
A) $950
B) $1000
C) $1037.50
D) $1075

Accepted Answer

The bond will pay $1000 at maturity, which is the face value of the bond.

Question 18

A bond with a rating of_____ will have a _____ yield to maturity than the other bonds listed.
A) AAA, higher
B) BBB, lower
C) BB, lower
D) B, higher

Accepted Answer

Bonds with lower credit ratings (like B) typically offer higher yields to maturity to compensate investors for the higher risk of default compared to bonds with higher credit ratings.

Question 19

When dealing with junk bonds, _____ have the highest degree of speculation, while_____ have the lowest.
A) C, B
B) BB, C
C) C, BB
D) CCC, C

Accepted Answer

In the bond rating system, BB-rated bonds are considered the highest quality within the junk bond category, indicating a lower degree of speculation compared to other junk bonds. C-rated bonds, on the other hand, are closer to the bottom of the credit quality scale within the junk bond category, indicating a higher degree of speculation.

Question 20

A zero coupon bond is best associated with which of the following terms of repayment?
A) interest only
B) sinking fund
C) balloon payment
D) call provision

Accepted Answer

A zero coupon bond does not pay interest throughout its life and instead is sold at a deep discount to its face value. Upon maturity, the bondholder receives the face value of the bond in a lump sum, which is effectively a balloon payment.

Quiz 4: Bond Fundamentals

Which is not used to identify a bond?

To find details about a specific bond, one would refer to a legal document known as the

A city wishing to build a new toll bridge across a river would most likely issue a(n)

A sinking fund is

Interest only, sinking fund, and balloon are

An annuity promises a_ amount of money on a periodic schedule for a _ amount of time.

Upon maturity of a zero coupon bond, the owner receives

All new debt now issued by the U.S. Treasury is in_____ form.

A $1,000 par bond with a closing price of 107 in the financial press has a dollar price of

A volume of 59 in the financial press for bonds means how much par value traded?

A bond with PEP 7.5s00 as its identifier

You see the following in the financial papers that a bond closed at 120, down 1/4. The previous closing price was

Which is better to own during a period of declining interest rates in terms of reinvestment rate risk?

Bonds rated below _____ are known as junk bonds.

Bonds that can be exchanged for common stock are said to be

With a consol, a level rate of interest is paid

A 7 1/2 % coupon semi-annual payment bond selling for $950 will pay how much to the holder at maturity?

A bond with a rating of_ will have a _ yield to maturity than the other bonds listed.

When dealing with junk bonds, _ have the highest degree of speculation, while_ have the lowest.

A zero coupon bond is best associated with which of the following terms of repayment?