Question 1

Typically,the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants,because ________.

Accepted Answer

Restrictive covenants are designed to protect bondholders by limiting certain actions a company can take, which might increase the risk of default. When bonds are considered safer due to these restrictions, investors are generally willing to accept a lower interest rate.

Question 2

(I)Because interest rates on Treasury bills are more volatile than rates on long-term securities,the return on short-term Treasury securities is usually above that on longer-term Treasury securities.
(II)A Treasury STRIP separates the periodic interest payments from the final principal repayment.

Accepted Answer

(I) is false because interest rates on short-term securities like Treasury bills are indeed more volatile, but this does not mean their returns are usually above those on longer-term securities. In fact, longer-term securities typically offer higher yields to compensate for their greater interest rate risk and longer maturity. (II) is true because a Treasury STRIP (Separate Trading of Registered Interest and Principal of Securities) does indeed separate the periodic interest payments from the final principal repayment, allowing investors to hold and trade the individual interest and principal components as separate securities.

Question 3

To sell an old bond when interest rates have ________,the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.

Accepted Answer

When interest rates rise, the price of existing bonds (which have lower interest rates compared to the new market rate) must be lowered to make their yield (interest payment relative to the bond's price) attractive to buyers, aligning it with the current higher market rates.

Question 4

Which of the following statements about Treasury inflation-indexed bonds is not true?

Accepted Answer

The answer of Which of the following statements about Treasury...

Question 5

The security with the longest maturity is a Treasury

Accepted Answer

A Treasury bond has the longest maturity of all Treasury securities, usually ranging from 20 to 30 years. Treasury notes have maturities ranging from 1 to 10 years, Treasury bills have maturities of less than 1 year, and acceptances are not issued by the U.S. government.

Question 6

Call provisions will be exercised when interest rates ________ and bond values ________.

Accepted Answer

Call provisions are typically exercised when interest rates fall, leading to an increase in bond values. This is because issuers can refinance their debt at a lower cost.

Question 7

(I)Most corporate bonds have a face value of $1,000,pay interest semiannually,and can be redeemed anytime the issuer wishes.
(II)Registered bonds have now been largely replaced by bearer bonds,which do not have coupons.

Accepted Answer

(I) is true as most corporate bonds do have a face value of $1,000, pay interest semiannually and can be redeemed anytime the issuer wishes. 
(II) is false as registered bonds have not been largely replaced by bearer bonds. Registered bonds keep records of ownership and interest payments, while bearer bonds have coupons attached to them and do not keep a record of ownership.

Question 8

A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called

Accepted Answer

A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year. This helps to ensure that the issuer will have enough funds to pay off the bond when it matures. A call provision allows the issuer to repay the bond before maturity, a restrictive covenant places restrictions on the issuer's ability to take certain actions (such as incurring more debt), and a shelf registration allows the issuer to register securities with the SEC without selling them immediately.

Question 9

(I)Callable bonds usually have a higher yield than comparable noncallable bonds.
(II)Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.

Accepted Answer

Callable bonds typically offer a higher yield to compensate investors for the risk of the bond being called away before maturity. Convertible bonds are attractive because they can be converted into a predetermined number of the issuer's shares, often making them more valuable than nonconvertible bonds.

Question 10

(I)In most years,the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond.
(II)Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.

Accepted Answer

Short-term Treasury bills typically offer lower returns than long-term Treasury bonds due to the lower risk and shorter maturity. Interest rates on Treasury bills are more volatile because they are more sensitive to changes in monetary policy and economic conditions.

Question 11

(I)To sell an old bond when interest rates have risen,the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
(II)The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.

Accepted Answer

Both statements are true. The first statement accurately describes the process of adjusting the price of an old bond to make its yield competitive with current market rates when interest rates have risen. The second statement correctly identifies the concept of interest-rate risk, which is the risk that a bond's value will decrease as a result of rising market interest rates.

Question 12

(I)Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
(II)General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.

Accepted Answer

(I) is true as municipal bonds used to fund essential public projects are exempt from federal taxation. This exemption is a significant advantage of investing in municipal bonds. 
(II) is also true as general obligation bonds are backed by the issuer's ability to levy taxes and have no specific asset pledged as security or a particular source of revenue allocated for their repayment.

Question 13

Policies that limit the discretion of managers as a way of protecting bondholders' interests are called

Accepted Answer

Restrictive covenants are policies written into bond indentures or loan agreements that limit the discretion of managers in order to protect the interests of bondholders. These covenants may include restrictions on additional borrowings, asset sales, and dividend payouts, among others. Therefore, A) is the correct choice. B) is incorrect because debentures refer specifically to unsecured bonds. C) is incorrect because sinking funds are separate accounts set up by issuers to accumulate funds for the retirement of bonds. D) is only partially correct because bond indentures may include other provisions beyond restrictive covenants.

Question 14

(I)Restrictive covenants often limit the amount of dividends that firms can pay the stockholders.
(II)Most corporate indentures include a call provision,which states that the issuer has the right to force the holder to sell the bond back.

Accepted Answer

Restrictive covenants may impose conditions on the payment of dividends to stockholders. Most corporate bond indentures include a call provision, granting the issuer the right to recall the bonds and forcing the bondholder to sell them back.

Question 15

Treasury bonds are subject to ________ risk but are free of ________ risk.

Accepted Answer

Treasury bonds are issued by the government and are considered to be free of default risk. However, they are subject to interest-rate risk, which means that their value can fluctuate depending on changes in the overall interest rate environment. Treasury bonds are not subject to underwriting risk, as they are directly issued by the government and do not require underwriting services from investment banks.

Question 16

The bond contract that states the lender's rights and privileges and the borrower's obligations is called the

Accepted Answer

A bond indenture is a legal contract that outlines the terms and conditions of a bond issue. It specifies the details of the bond, such as the principal amount, interest rate, payment dates, and the rights and obligations of both the lender (bondholders) and borrower (issuer). The bond indenture includes covenants, which are promises made by the issuer to the bondholders, and other provisions that protect bondholders' interests. The bond indenture is also sometimes referred to as the bond agreement or bond instrument.

Question 17

Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called

Accepted Answer

Debentures are long-term unsecured bonds that are not backed by any collateral but instead rely solely on the creditworthiness and reputation of the issuer. Junk bonds are also unsecured bonds, but they carry a higher risk of default and are typically offered by companies with lower credit ratings. Callable bonds give the issuer the right to redeem the bonds before maturity, while convertible bonds can be converted into a predetermined number of shares of the issuer's common stock.

Question 18

Most of the time,the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk.

Accepted Answer

Treasury notes and bonds typically offer higher interest rates than money market securities due to the longer-term nature of the investment, which exposes them to greater interest-rate risk.

Question 19

Restrictive covenants can

Accepted Answer

Restrictive covenants can limit the amount of dividends the firm can pay, limit the ability of the firm to issue additional debt, and restrict the ability of the firm to enter into a merger agreement. Therefore, option D is the correct answer.

Question 20

The prices of Treasury notes,bonds,and bills are quoted

Accepted Answer

The prices of Treasury notes, bonds and bills are quoted as a percentage of their face value, which is usually $100. For example, if a Treasury bond is selling for 105, its price is 105% of its $100 face value, or $105.

Quiz 12: The Bond Market

Typically,the interest rate on corporate bonds will be the more restrictions are placed on management through restrictive covenants,because .

(I) Because interest rates on Treasury bills are more volatile than rates on long-term securities,the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment.

To sell an old bond when interest rates have ,the holder will have to the price of the bond until the yield to the buyer is the same as the market rate.

Which of the following statements about Treasury inflation-indexed bonds is not true?

The security with the longest maturity is a Treasury

Call provisions will be exercised when interest rates and bond values .

(I) Most corporate bonds have a face value of $1,000,pay interest semiannually,and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds,which do not have coupons.

A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called

(I) Callable bonds usually have a higher yield than comparable noncallable bonds. (II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.

(I) In most years,the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.

(I) To sell an old bond when interest rates have risen,the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.

(I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.

Policies that limit the discretion of managers as a way of protecting bondholders' interests are called

(I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II) Most corporate indentures include a call provision,which states that the issuer has the right to force the holder to sell the bond back.

Treasury bonds are subject to risk but are free of risk.

The bond contract that states the lender's rights and privileges and the borrower's obligations is called the

Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called

Most of the time,the interest rate on Treasury notes and bonds is that on money market securities because of risk.

Restrictive covenants can

The prices of Treasury notes,bonds,and bills are quoted