Bond Types
Jason’s Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
a. Note
b. Discounted
c. Zero-coupon
d. Callable
e. Debenture
What is Debenture?
A bond's coupon rate is equal to the annual interest divided by which one of the following?
a. Call price
b. Current price
c. Face value
d. Clean price
e. Dirty price
What is Face Value?
Protective covenants:
a. Apply to short-term debt issues but not long-term debt issues
b. Only apply to privately issued bonds
c. Are a feature found only in government-issued bond indentures
d. Only apply to bonds that have a deferred call provision
e. Are primarily designed to protect bondholders
Are primarily designed to protect bondholders
U. S. Treasury bonds are:
a. Are highly illiquid
b. Are quoted as a percentage of par.
c. Are quoted at the dirty price
d. Pay interest that is federally tax-exempt
e. Must be held until maturity
Are quoted as a percentage of par.
The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return.
a. Default
b. Market movements
c. Interest rate changes
d. Inflation
e. The time to maturity
What is Inflation?
A bond that is payable to whomever has physical possession of the bond is said to be in:
a. New-issue condition
b. Registered form
c. Bearer form
d. Debenture status
e. Collateral status
What is Bearer form?
The collar of a floating-rate bond refers to the minimum and maximum:
a. Call periods
b. Maturity dates
c. Market prices
d. Coupon rates
e. Yields to maturity
What is Coupon rates?
Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:
a. Quoted price
b. Spread price
c. Clean price
d. Dirty price
e. Call price
What is Dirty price?
Municipal bonds:
a. Are totally risk free
b. Generally have higher coupon rates than corporate bonds
c. Pay interest that is federally tax free
d. Are rarely callable
e. Are free of default risk
Pay interest that is federally tax free
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
a. Risk-free rate
b. Realized rate
c. Nominal rate
d. Real rate
e. Current rate
What is Real Rate?
Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
a. At par
b. In registered form
c. In street form
d. As debentures
e. As callable bonds
What is In registered form?
Treasury bonds are:
a. Issued by any governmental agency in the U.S.
b. Issued only on the first day of each fiscal year by the U.S. Department of Treasury
c. Bonds that offer the best tax benefits of any bonds currently available
d. Generally issued as semiannual coupon bonds
e. Totally risk free
Generally issued as semiannual coupon bonds
A bond is quoted at a price of $1,011. This price is referred to as the:
a. Call price
b. Face value
c. Clean price
d. Dirty price
e. Maturity price
What is Clean Price?
A "fallen angel" is a bond that has moved from:
a. Being publicly traded to being privately traded
b. Being a long-term obligation to being a short-term obligation
c. Being a premium bond to being a discount bond
d. Senior status to junior status for liquidation purposes
e. Investment grade to speculative grade
Investment grade to speculative grade
As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:
a. Increases at an increasing rate
b. Increases at a decreasing rate
c. Increases at a constant rate
d. Decreases at an increasing rate
e. Decreases at a decreasing rate
Increases at a decreasing rate
Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?
a. Put provision
b. Positive covenant
c. Warrant
d. Crossover rating
e. Call provision
What is Warrant?
The interest rate risk premium is the:
a. Additional compensation paid to investors to offset rising prices
b. Compensation investors demand for accepting interest rate risk
c. Difference between the yield to maturity and the current yield
d. Difference between the market interest rate and the coupon rate
e. Difference between the coupon rate and the current yield
Compensation investors demand for accepting interest rate risk
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond’s interest or principal payments as expected?
a. Default risk
b. Taxability
c. Liquidity
d. Inflation
e. Interest rate risk
What is Default Risk?
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?
a. Clean Price
b. Dirty price
c. Asked price
d. Quoted price
e. Bid Price
What is Dirty Price?
Interest rates that include an inflation premium are referred to as:
a. Annual percentage rates
b. Stripped rates
c. Effective annual rates
d. Real rates
e. Nominal rates
What is Nominal rates?
Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this?
a. NoNo Bond
b. Put Bond
c. Contingent, callable bond
d. Structured note
e. Sukuk
What is Structured Note?
Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?
a. Semiannual coupon
b. Discount bond
c. Note
d. Trust deed
e. Collateralized
What is Note?
A deferred call provision is which one of the following?
a. Requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond.
b. Ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.
c. Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity
d. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
e. Requirement that a bond issuer pay a call premium that is equal to or greater than one year's coupon should that issuer decide to call a bond.
Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?
a. The bond rating is B
b. Market value is less than face value
c. The coupon rate is 3 percent
d. It has a "make whole call price
e. Variable interest payments are variable
It has a "make whole" call price
Real rates are defined as nominal rates that have been adjusted for which of the following?
a. Inflation
b. Default risk
c. Accrued interest
d. Interest rate risk
e. Both inflation and interest rate risk
What is Inflation?