Question 1

A bond? s annual interest divided by its face value is referred to as the:

Accepted Answer

The annual interest payment on a bond relative to its face value is known as the coupon rate. This is the fixed percentage of face value that the bondholder will receive as interest payments each year until the bond matures.

Question 2

A registered-form bond is defined as a bond that:

Accepted Answer

A registered-form bond is one that is registered in the owner's name with the issuer, who then pays coupon payments directly to the owner of record. This is in contrast to a bearer bond, which does not have a registered owner and pays coupon payments to whoever holds the physical bond. Choice A is incorrect because a registered-form bond is not a bearer bond. Choice B is incorrect because holding a bond in street name means that it is held by a broker or custodian on behalf of the owner, but this is not essential for a bond to be considered registered-form. Choice D is incorrect because registration with the SEC is not a defining characteristic of a registered-form bond. Choice E is incorrect because a bond can be registered-form and still be secured with collateral.

Question 3

What is the principal amount of a bond that is repaid at the end of the loan term called?

Accepted Answer

The principal amount of a bond that is repaid at the end of the loan term is called the face value or par value of the bond. This is the amount that the bond issuer promises to repay to the bondholder upon maturity. Therefore, the best choice is E, face value.

Question 4

This morning,Jeff found an aged bond certificate lying on the street.He picked it up and noticed that it was a 50-year bond that matured today.He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment.The bond that Jeff found must have been which one of the following?

Accepted Answer

The fact that Jeff found an aged bond certificate lying on the street suggests that it was a bearer-form bond, which is a type of bond that does not have the owner's name registered on it, and can be transferred by mere possession. Additionally, the fact that Jeff was able to present the bond to the bank teller and receive payment for both the principal and final interest payment suggests that it must have been a matured bond, and therefore, it must have been a bond that had reached its maturity date. Therefore, the best choice is D) Bearer-form bond.

Question 5

The written agreement that contains the specific details related to a bond issue is called the bond:

Accepted Answer

An indenture is the written agreement or contract between the issuer of a bond and the bondholders, outlining the specific terms and conditions of the bond issue, such as interest rate, maturity date, and repayment terms. Debenture refers to a specific type of bond that is unsecured and backed only by the creditworthiness of the issuer, while a registration statement is a filing with the Securities and Exchange Commission that discloses important information about a security to potential investors. Document and issue paper are both general terms that do not specifically refer to the contract for a bond issue.

Question 6

The call premium is the amount by which the:

Accepted Answer

The answer of The call premium is the amount by...

Question 7

A call provision grants the bond issuer the:

Accepted Answer

A call provision grants the bond issuer the option of repurchasing the bonds prior to maturity at a prespecified price. This price is often set above the face value of the bond to provide an incentive for bondholders to sell back their bonds. This provision is used by issuers to protect against rising interest rates and to retire high-cost debt.

Question 8

A company originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.These bonds are referred to as:

Accepted Answer

Bonds that were once rated investment grade but have been downgraded to junk status are called "fallen angels."

Question 9

A protective covenant:

Accepted Answer

A protective covenant is a provision in a bond agreement that limits the actions of the borrower (issuer of the bond) in order to protect the interests of the bondholders. These covenants typically place restrictions on the issuer's ability to take certain actions, such as selling assets or taking on additional debt, without the consent of the bondholders. By limiting the issuer's actions, the bondholders are better protected against default or other unfavorable events that could affect the value of the bond. Protective covenants do not guarantee interest and principal payments, nor do they guarantee the market price of a bond will never be less than par value.

Question 10

The market-required rate of return on a bond that is held for its entire life is called the:

Accepted Answer

The yield to maturity is the market-required rate of return on a bond that is held for its entire life. It takes into account the current market price, the face value of the bond, and the interest payments received over the life of the bond. The coupon rate is the interest rate stated on the bond when it is issued, while the dirty yield includes any accrued interest or fees. The call premium is the amount paid to redeem a callable bond, and the current yield is the annual interest payment divided by the current market price of the bond.

Question 11

Travis recently purchased a callable bond.However,that bond cannot be currently redeemed by the issuer.Thus,the bond must currently be:

Accepted Answer

A callable bond means the issuer has the right to redeem the bond before its maturity date. If the bond cannot be currently redeemed by the issuer, it means it is call protected, meaning there is a period where the issuer cannot call back the bond. So the best choice is option D.

Question 12

Russell? s has a bond issue outstanding.The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance.This provision is referred to as the _____ provision.

Accepted Answer

The provision that prohibits the firm from redeeming the bonds during the first five years following issuance is known as a deferred call provision. This provision is designed to protect bondholders by ensuring that they have a fixed stream of income for a specified period, which can provide them with a measure of financial stability.

Question 13

The current yield on a bond is equal to the annual interest divided by the:

Accepted Answer

The current yield on a bond is calculated by dividing the annual interest payment by the current market price of the bond. Therefore, the correct answer is D) current market price.

Question 14

Miller Farm Products is issuing a 15-year,unsecured bond.Based on this information,you know that this debt can bedescribed as a:

Accepted Answer

A debenture is an unsecured bond with a long-term maturity of more than 10 years, making it the best choice given the description provided in the question. A note is typically a short-term debt with a maturity of less than 10 years, while bearer form and registered form bonds refer to how the bond is issued or transferred. Call protection refers to whether or not the bond issuer can redeem the bond before its maturity date, which is not mentioned in the question.

Question 15

The price at which a dealer will purchase a bond is referred to as the _____ price.

Accepted Answer

The bid price is the price at which a dealer is willing to buy a bond from an investor. The other options are not relevant to the purchase of a bond by a dealer.

Question 16

The price at which an investor can purchase in the bond market is called the _____ price.

Accepted Answer

The answer of The price at which an investor can...

Question 17

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Accepted Answer

A zero coupon bond does not make regular interest payments to bondholders. Instead, it is issued at a deep discount (meaning it is sold for much less than its face value) and then redeemed for its face value at maturity. Therefore, it only makes one payment to bondholders.

Question 18

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Accepted Answer

When a bond is priced at par, its coupon rate is equal to its yield to maturity and current yield.

Question 19

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Accepted Answer

A sinking fund is a specific type of account that a bond trustee manages for the sole purpose of redeeming bonds early. Money is regularly deposited into this account and used to buy back outstanding bonds. This reduces the amount of debt the issuer has outstanding and can help improve their creditworthiness.

Question 20

On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

Accepted Answer

The entire principal amount of a semiannual coupon bond is typically repaid on the maturity date.

Quiz 6: Interest Rates and Bond Valuation