Question 1

RRB are

Accepted Answer

RRB stands for Real Return Bonds, which are government bonds with par value linked to the general level of prices, providing protection against inflation.

Question 2

A coupon bond that pays interest annually has a par value of $1,000,matures in 6 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

Accepted Answer

To calculate the intrinsic value of the bond, we need to use the formula:

Intrinsic value = (C / Y) * [1 - 1 / (1 + Y)^n] + M / (1 + Y)^n

Where: 
C = Annual coupon payment = Par value * Coupon rate = $1,000 * 7.5% = $75 
Y = Yield to maturity = 11% 
n = Number of years until maturity = 6 
M = Par value = $1,000

Plugging in the values:

Intrinsic value = ($75 / 11%) * [1 - 1 / (1 + 11%)^6] + $1,000 / (1 + 11%)^6 
Intrinsic value = $578.63 + $273.30 
Intrinsic value = $851.93

Therefore, the best choice is B, which is the closest value to the calculated intrinsic value.

Question 3

In the 2002-2004 time period the median return on capital ratio for bonds rated AAA by Standard and Poor's was

Accepted Answer

The median return on capital ratio for bonds rated AAA by Standard and Poor's during the 2002-2004 period was 27.6%.

Question 4

Debt securities are often called fixed-income securities because

Accepted Answer

Debt securities are called fixed-income securities because they promise either a fixed stream of income or a stream of income determined by a specific formula. This is in contrast to equity securities, which offer a variable stream of income depending on the company's profitability. The fixed income from debt securities makes them attractive to investors seeking a reliable source of income.

Question 5

Most corporate bonds are traded

Accepted Answer

Most corporate bonds are traded over the counter by bond dealers linked by a computer quotation system. They are not traded on a formal exchange like stock market exchanges such as the New York Stock Exchange or the Toronto Stock Exchange.

Question 6

Which of the following is not a type of international bond?

Accepted Answer

Elton bonds are not a type of international bond. This is not a recognized category of bonds. The other options, Samurai bonds, Yankee bonds, and bulldog bonds, are all types of international bonds.

Question 7

Collateralized bonds

Accepted Answer

Collateralized bonds are backed by specific assets of the issuing firm, making them a safer investment option. These assets serve as collateral for the bond, reducing the risk of default. Therefore, option B is correct. However, collateralized bonds may not be considered the safest assets of the firm as their safety ultimately depends on the quality and value of the underlying assets. Hence, option C is incorrect. Option A is also incorrect as the safety of collateralized bonds is not solely reliant on the general earning power of the firm.

Question 8

A zero-coupon bond is one that

Accepted Answer

A zero-coupon bond is one that effectively has a zero percent coupon rate. This means that the bond does not pay periodic interest payments like most bonds, but instead is offered at a discounted price and pays out the full face value at maturity.

Question 9

One year ago,you purchased a newly issued real return bond that has a 6% coupon rate,five years to maturity,and a par value of $1,000.The average inflation rate over the year was 4.2%.What is the amount of the coupon payment you will receive and what is the current face value of the bond?

Accepted Answer

The coupon payment is adjusted for inflation: $60 * 1.042 = $62.52. The face value is also adjusted for inflation: $1,000 * 1.042 = $1,042.

Question 10

Subordination clauses in bond indentures

Accepted Answer

Subordination clauses in bond indentures can restrict the amount of additional borrowing a firm can undertake as well as provide higher priority to senior creditors in the event of bankruptcy. These clauses are often referred to as "mezzanine" or "junior" debt since they are subordinated to senior debt. Therefore, option D is the correct answer.

Question 11

Convertible bonds

Accepted Answer

Convertible bonds allow holders to convert their bonds into a predetermined number of shares, enabling them to benefit from stock price appreciation. They typically offer lower coupon rates than nonconvertible bonds due to the added value of the conversion option.

Question 12

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called

Accepted Answer

This process is commonly known as refunding, where a company or government issues new bonds at lower coupon rates to replace existing high-coupon debt. This helps to reduce interest payments and potentially lower overall borrowing costs.

Question 13

Bearer bonds are

Accepted Answer

Bearer bonds are bonds that do not have any record of ownership and can be transferred simply by their possession, thus making it difficult for tax authorities to track the holder and enforce tax collection. In the United States, such types of bonds are now rare due to regulatory changes.

Question 14

Bond analysts might be more interested in a bond's yield to call if

Accepted Answer

The answer of Bond analysts might be more interested in...

Question 15

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict

Accepted Answer

Altman's Z scores are used to predict bankruptcy risk.

Question 16

Most preferred stock
I.pays a fixed dividend.
II.pays a floating-rate dividend.
III.is held by corporations.
IV.is held by individuals.

Accepted Answer

Most preferred stock pays a fixed dividend and is often held by corporations due to tax advantages.

Question 17

What is the relationship between the price of a straight bond and the price of a callable bond?

Accepted Answer

A callable bond gives the issuer the right to pay off the bond before its maturity date, usually at a predetermined price. When interest rates are low, the issuer is more likely to call the bond to refinance at a lower rate. This potential for early redemption limits the price appreciation of callable bonds in low-interest-rate environments, making straight (non-callable) bonds more valuable since they do not have this risk of being called away.

Question 18

When a bond indenture includes a sinking fund provision

Accepted Answer

A sinking fund provision allows the issuer to repurchase bonds before maturity, potentially at below-market prices, which may not benefit bondholders.

Question 19

Swingin' Soiree,Inc.is a firm that has its main office on the Right Bank in Paris.The firm just issued bonds with a final payment amount that depends on whether the Seine River floods.This type of bond is known as

Accepted Answer

The bond is directly affected by a catastrophic event - the flooding of the Seine River. Therefore, it is classified as a catastrophe bond.

Question 20

Three years ago you purchased a bond for $974.69.The bond had three years to maturity,a coupon rate of 8%,paid annually,and a face value of $1,000.Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below.Today is the bond's maturity date.What is your realized compound yield on the bond? $$\begin{array} { l c } 
\text { Time } & \text { Prevailing Reinvestment Rate } \
0 \text { (purchase date) } & 6.0 \% \
1 & 7.2 \% \
2 & 9.4 \% \
3 \text { (maturity date) } & 8.2 \%
\end{array}$$

Accepted Answer

The answer of Three years ago you purchased a bond...

Quiz 12: Macroeconomic and Industry Analysis