Question 1

____ are not primary purchasers of bonds.

Accepted Answer

Finance companies are not considered primary purchasers of bonds, as they typically specialize in providing loans and other forms of financing to individuals and businesses, rather than investing in fixed-income securities. Insurance companies, mutual funds, and pension funds are all considered primary purchasers of bonds, as they frequently invest in these securities as part of their investment portfolios.

Question 2

Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in

Accepted Answer

By denominating the bonds in euros and making payments from its German subsidiary, the U.S. firm can take advantage of the lower German interest rates while avoiding exchange rate risk. If the bonds were denominated in dollars, the firm would still be subject to potential fluctuations in the exchange rate between the two currencies. Additionally, if the firm made payments from their U.S. headquarters, they would have to convert the dollars to euros, which could result in additional exchange rate losses.

Question 3

Bonds that are secured by personal property are called

Accepted Answer

Chattel refers to moveable personal property, and a chattel mortgage bond is secured by such property. First and second mortgage bonds are typically secured by real estate, and debentures are unsecured.

Question 4

The coupon rate of most variable-rate bonds is tied to

Accepted Answer

The coupon rate of most variable-rate bonds is tied to LIBOR (London Interbank Offered Rate), which is the interest rate at which banks can borrow funds from other banks in the London interbank market. This rate is widely used as a benchmark for short-term interest rates, and the coupon rate on variable-rate bonds is usually set as a spread over the prevailing LIBOR rate.

Question 5

Leveraged buyouts are commonly financed by the issuance of:

Accepted Answer

Leveraged buyouts (LBOs) are typically financed through the issuance of corporate bonds. These are long-term debt securities that are issued by companies to raise funds for a variety of purposes, including acquisitions such as LBOs. In an LBO, a company takes on a significant amount of debt to finance the purchase of another company, and the issuing of corporate bonds allows the acquirer to raise the funds needed for the transaction. Money market securities, Treasury bonds, and municipal bonds are not typically used to finance LBOs.

Question 6

Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.

Accepted Answer

Typically, bonds have a single call price specified in the bond covenant, regardless of the reason for calling the bond, whether it's for sinking fund requirements or other reasons. The call price may vary over time but not typically based on the reason for the call.

Question 7

____ bonds have the most active secondary market.

Accepted Answer

Treasury bonds are considered to be the safest of all bond types, and therefore have a very active secondary market. In addition, they are backed by the United States government which makes them highly liquid, easy to buy and sell, and a preferred investment vehicle for many investors. Zero-coupon corporate bonds are less well-known and less widely traded, while junk bonds and municipal bonds are generally considered to be riskier and less liquid than Treasuries.

Question 8

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.

Accepted Answer

When a firm plans a leveraged buyout, it will add more debt to its balance sheet, meaning that the firm's overall creditworthiness will decline. As a result, investors who hold corporate bonds issued by the same firm can expect the market value of their bonds to decline.

Question 9

Some bonds are "stripped," which means that

Accepted Answer

Stripping a bond means separating it into its principal and interest components, turning it into principal-only and interest-only securities. This is often done to create securities that are more attractive to investors with specific needs or preferences, such as those seeking steady income or those looking for long-term capital gains. Stripped bonds are not necessarily in default, and their call provisions and maturities remain unchanged.

Question 10

Which of the following statements is true regarding STRIPS?

Accepted Answer

STRIPS (Separate Trading of Registered Interest and Principal of Securities) are created by financial institutions by separating the interest and principal components of Treasury securities. They are backed by the U.S. government and do not have to be held until maturity.

Question 11

Bonds that are not secured by specific property are called

Accepted Answer

Debentures are bonds that are not secured by specific property. Option A, chattel mortgages, are loans that are secured by movable personal property, such as equipment or vehicles. Option B, open-end mortgage bonds, are mortgages that allow for additional borrowing against the property. Option D, blanket mortgage bonds, are mortgages that cover multiple properties.

Question 12

During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods.

Accepted Answer

During weak economic periods, investors are more cautious and demand higher risk premiums for junk bonds to compensate for the higher risk of default. As a result, newly issued junk bonds require higher risk premiums than in strong economic periods.

Question 13

A call provision on bonds normally

Accepted Answer

A call provision allows the issuer to buy back the bonds that it previously issued before the maturity date. This gives the issuer flexibility if it wants to refinance the debt at a lower interest rate or if it needs to adjust its capital structure. Selling new bonds at par or above market value, or selling bonds to the Treasury, are not typically associated with a call provision.

Question 14

When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.

Accepted Answer

Structured notes are debt securities with a payout structure that is tied to specific market conditions. This can include factors such as interest rates, Treasury bond prices, or even stock prices, which can result in variable returns for the investor.

Question 15

Which of the following is not true regarding zero-coupon bonds?

Accepted Answer

The answer of Which of the following is not true...

Question 16

Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

Accepted Answer

The yield to maturity represents the total return that the investor will earn if they hold the bond until maturity. Therefore, Devin will earn a return of 9 percent, which is the yield to maturity on the bond. The coupon rate of 12 percent is simply the annual interest payment that Devin will receive from holding the bond, but it does not represent his total return.

Question 17

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

Accepted Answer

The answer of (Financial calculator required.) Erin is, a private...

Question 18

When would a firm most likely call bonds?

Accepted Answer

A firm is most likely to call bonds after interest rates have declined because it can refinance the debt at a lower interest rate, reducing its interest expenses.

Question 19

(Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.

Accepted Answer

Using a financial calculator, we can solve for the yield to maturity (YTM) using the following inputs:

N = 15 (number of years until maturity)
PV = -1100 (price paid for the bond)
PMT = 90 (annual coupon payment, which is 9% of the $1,000 par value)
FV = 1000 (par value)

Solving for I/Y (the YTM) gives us approximately 7.84%. Therefore, the answer is B.

Question 20

Which of the following is not true regarding the call provision?

Accepted Answer