Fundamentals of Corporate Finance 7th Edition Test Bank Richard Brealey

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Fundamentals of Corporate Finance 7th Edition Test Bank Richard Brealey

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7
1. The stated interest payment, in dollars, made on a bond each period is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

2. The principal amount of a bond that is repaid at the end of the loan term is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

3. The specified date on which the principal amount of a bond is repaid is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

4. The rate of return required by investors in the market for owning a bond is called the:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

5. The annual coupon of a bond divided by its face value is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

A. par value

B. discount

C. premium

D. zero coupon

E. floating rate

7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

A. par

B. discount

C. premium

D. zero coupon

E. floating rate

8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

A. par

B. discount

C. premium

D. zero coupon

E. floating rate

9. The unfunded debt of a firm is generally understood to mean the firms:

A. preferred stock.

B. debts that mature in more than one year.

C. debentures.

D. debts that mature in less than one year.

E. secured debt.

10. The written, legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is called the:

A. indenture.

B. covenant.

C. terms of trade.

D. form 5140.

E. call provision.

11. The form of bond issue in which the registrar of the company records ownership of each bond, with relevant payments made directly to the owner of record, is called the _____ form.

A. new-issue

B. registered

C. bearer

D. debenture

E. collateral

12. The form of bond issue in which the bond is issued without record of the owners name, with relevant payments made directly to whoever physically holds the bond, is called the _____ form.

A. new-issue

B. registered

C. bearer

D. debenture

E. collateral

13. The unsecured debts of a firm with maturities greater than 10 years are most literally called:

A. unfunded liabilities.

B. sinking funds.

C. bonds.

D. notes.

E. debentures.

14. The unsecured debts of a firm with maturities less than 10 years are most literally called:

A. unfunded liabilities.

B. sinking funds.

C. bonds.

D. notes.

E. debentures.

15. In the event of default, _____ debt holders must give preference to more _____ debt holders in the priority of repayment distributions.

A. short-term; long-term

B. long-term; short-term

C. senior; junior

D. senior; subordinated

E. subordinated; senior

16. An account managed by the bond trustee for early bond redemption payments is called a:

A. sinking fund.

B. collateral payment account.

C. deed in trust account.

D. call provision.

E. par value fund.

17. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision.

A. sinking fund

B. call

C. seniority

D. collateral

E. trustee

18. The amount by which the call price exceeds the bonds par value is the:

A. coupon rate.

B. redemption value.

C. call premium.

D. original-issue discount.

E. call rate.

19. A deferred call provision refers to the:

A. open market price of a callable bond on a certain date.

B. seniority of callable bonds to noncallable bonds in the event of corporate default.

C. prohibition of a company from ever redeeming callable bonds.

D. prohibition of a company from redeeming callable bonds prior to a certain date.

E. amount by which the call price for a callable bond exceeds its par value.

20. Parts of the indenture limiting certain actions that might be taken during the term of the loan to protect the interests of the lender are called:

A. trustee relationships.

B. sinking funds provisions.

C. bond ratings.

D. deferred call provisions.

E. protective covenants.

21. The long-term bonds issued by the United States government are called _____ bonds.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

22. The long-term bonds issued by state and local governments in the United States are called _____ bonds.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

23. A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

24. A bond that pays a variable amount of coupon interest over time is called a _____ bond.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

25. A bond which, at the election of the holder, can be swapped for a fixed number of shares of common stock at any time prior to the bonds maturity is called a _____ bond.

A. zero coupon

B. callable

C. putable

D. convertible

E. warrant

26. A financial market is _____ if it is possible to easily observe its prices and trading volume.

A. transparent

B. open

C. ordered

D. in equilibrium

E. chaotic

27. The annual coupon payment of a bond divided by its market price is called the:

A. coupon rate.

B. current yield.

C. yield to maturity.

D. bid-ask spread.

E. capital gains yield.

28. The price a dealer is willing to pay for a security held by an investor is called the:

A. equilibrium price.

B. ask price.

C. bid price.

D. bid-ask spread.

E. auction price.

29. The price a dealer is willing to accept for selling a security to an investor is called the:

A. equilibrium price.

B. auction price.

C. bid price.

D. ask price.

E. bid-ask spread.

30. Interest rates or rates of return on investments that have not been adjusted for the effects of inflation are called _____ rates.

A. coupon

B. stripped

C. effective

D. real

E. nominal

31. Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

A. real

B. nominal

C. effective

D. stripped

E. coupon

32. The relationship between nominal rates, real rates, and inflation is known as the:

A. Miller and Modigliani theorem.

B. Fisher effect.

C. Gordon growth model.

D. term structure of interest rates.

E. interest rate risk premium.

33. The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:

A. liquidity effect.

B. Fisher effect.

C. term structure of interest rates.

D. inflation premium.

E. interest rate risk premium.

34. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk

35. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk

36. A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

A. $1,007; $70

B. $1,070; $35

C. $1,070; $70

D. $1,000; $35

E. $1,000; $70

37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

A. a premium; higher than

B. a premium; equal to

C. at par; higher than

D. at par; less than

E. a discount; higher than

38. All else constant, a coupon bond that is selling at a premium, must have:

A. a coupon rate that is equal to the yield to maturity.

B. a market price that is less than par value.

C. semi-annual interest payments.

D. a yield to maturity that is less than the coupon rate.

E. a coupon rate that is less than the yield to maturity.

39. The market price of a bond is equal to the present value of the:

A. face value minus the present value of the annuity payments.

B. annuity payments plus the future value of the face amount.

C. face value plus the present value of the annuity payments.

D. face value plus the future value of the annuity payments.

E. annuity payments minus the face value of the bond.

40. As the yield to maturity increases, the:

A. amount the investor is willing to pay to buy a bond decreases.

B. longer the time to maturity.

C. lower the coupon rate desired by that investor.

D. higher the price the investor offers to buy a bond.

E. lower the rate of return desired by the investor.

41. American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.

A. I and II only

B. II and III only

C. II, III, and IV only

D. I, II, and III only

E. I, III, and IV only

42. The newly issued bonds of the Wynslow Corp. offer a 6 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

A. equal to 3 percent.

B. greater than 3 percent but less than 4 percent.

C. equal to 6 percent.

D. greater than 6 percent but less than 7 percent.

E. equal to 12 percent.

43. Which one of the following statements is correct concerning interest rate risk as it relates to bonds, all else equal?

A. The shorter the time to maturity, the greater the interest rate risk.

B. The higher the coupon rate, the greater the interest rate risk.

C. For a bond selling at par value, there is no interest rate risk.

D. The greater the number of semiannual interest payments, the greater the interest rate risk.

E. The lower the amount of each interest payment, the lower the interest rate risk.

44. Which one of the following bonds has the greatest interest rate risk?

A. 5-year; 9 percent coupon

B. 5-year; 7 percent coupon

C. 7-year; 7 percent coupon

D. 9-year; 9 percent coupon

E. 9-year; 7 percent coupon

45. Interest rate risk _____ as the time to maturity increases.

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

46. You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:

A. the bond issuer to increase the amount of each interest payment on these bonds.

B. the yield to maturity to remain constant due to the fixed coupon rate.

C. to realize a capital loss if you sold the bond at the market price today.

D. todays market price to exceed the face value of the bond.

E. the current yield today to be less than 7 percent.

47. You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase _____ bonds.

A. short-term; low coupon

B. short-term; high coupon

C. long-term; zero coupon

D. long-term; low coupon

E. long-term; high coupon

48. All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____

A. increases; increases.

B. increases; decreases.

C. remains constant; increases.

D. decreases; increases.

E. decreases; decreases.

49. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principle is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.

A. II only

B. I and II only

C. III and IV only

D. II and IV only

E. II, III, and IV only

50. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. protective covenants

A. I and II only

B. II and IV only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

51. Which one of the following statements is correct concerning bond classifications?

A. A debenture is a long-term bond secured by the fixed assets of a firm.

B. A mortgage security is a bond issued solely by a home builder.

C. A note is a bond which has an original maturity date longer than 10 years.

D. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.

E. A callable bond can be repurchased by the issuer prior to the initial maturity date.

52. Callable bonds generally:

A. allow the bondholder to decide when the bond is to be called.

B. are associated with sinking funds.

C. permit the issuer to repurchase the bonds at a discount.

D. are called within the first couple of years after issuance.

E. are required to have a deferred call provision if they have a make-whole call provision.

53. Which of the following is a (are) positive covenant(s) that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.

A. I only

B. I and II only

C. I and IV only

D. II and IV only

E. I, II, and IV only

54. Protective covenants:

A. are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.

B. are consistent for all bonds issued by a corporation within the United States.

C. are limited to stating actions which a firm must take.

D. only apply to bonds that have a deferred call provision.

E. are primarily designed to protect bondholders from future actions of the bond issuer.

55. Which one of the following statements concerning bond ratings is correct?

A. Standard and Poors and Value Line are the primary bond rating agencies.

B. Bond ratings are solely an assessment of the creditworthiness of the bond issuer.

C. Investment grade bonds include only those bonds receiving one of the highest three bond ratings.

D. Bond ratings evaluate the expected price volatility of a bond issue.

E. All bonds receive the same rating classification from all rating agencies.

56. A fallen angel is a bond that:

A. lowered its annual interest payment.

B. has moved from being a long-term obligation to being a short-term obligation.

C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate.

D. has moved from being an investment-grade bond to being a junk bond.

E. is rated as Ba by one rating agency and rated as BB by another rating agency.

57. Bonds issued by the U.S. government:
I. are considered to be free of default risk.
II. are considered to be free of interest rate risk.
III. provide totally tax-free income.
IV. pay interest that is exempt from federal income taxes.

A. I only

B. I and III only

C. I and IV only

D. II and III only

E. II and IV only

58. Treasury bonds are:

A. those bonds 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. preferred by high-income individuals because they offer the best tax benefits.

D. generally issued as coupon bonds.

E. totally risk-free.

59. Municipal bonds:

A. offer income tax advantages to individuals.

B. generally pay a higher rate of return than corporate bonds.

C. are those bonds issued only by local municipalities, such as a city or a borough.

D. are rarely callable.

E. pay interest that is always exempt from both federal and state income taxes.

60. The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

A. .07 (1 t*) = .05.

B. .05 (1 t*) = .07.

C. .07 + (1 t*) = .05.

D. .07 x (1 t*) = .05.

E. .05 x (1 t*) = .07.

61. A zero coupon bond:

A. is sold at a large premium.

B. has a price equal to the future value of the face amount given a specified rate of return.

C. can only be issued by the U.S. Treasury.

D. has less interest rate risk than a comparable coupon bond.

E. has implicit interest which is calculated by amortizing the loan.

62. The total interest paid on a zero-coupon bond is equal to:

A. zero.

B. the face value minus the issue price.

C. the face value minus the market price on the maturity date.

D. $1,000 minus the face value.

E. $1,000 minus the par value.

63. 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.

64. Which of the following are common characteristics of floating-rate bonds?
I. adjustable coupon rates
II. adjustable maturity dates
III. put provision
IV. coupon cap

A. I and II only

B. II and III only

C. I, II, and IV only

D. I, III, and IV only

E. I, II, III, and IV

65. A corporation is more prone to issue floating-rate bonds when they expect future interest rates to _____ over the life of the bond.

A. remain constant

B. increase briefly and then decline slightly

C. continually decline

D. decline briefly and then increase significantly

E. continually increase

66. Cat bonds are primarily designed to help:

A. cities recover from economic recessions.

B. corporations recover from overseas competition.

C. the federal government cope with huge deficits.

D. animal food producers raise capital to compete internationally.

E. insurance companies recover from natural disasters.

67. Investors generally tend to buy:

A. Treasury bonds for their high yields.

B. municipal bonds for their high yields.

C. convertible bonds for their potential price appreciation.

D. corporate bonds for their liquidity.

E. Treasury bonds for their preferential tax treatment.

68. A convertible bond is a bond that can be:

A. exchanged for cash at prescribed points in time.

B. exchanged for a stated number of shares of common stock of the bond issuer.

C. modified from a fixed coupon bond into a floating coupon bond at prescribed points in time.

D. submitted to the issuer for redemption at the discretion of the bondholder.

E. submitted for payment any time the economy converts into a recessionary period.

69. A put provision in a bond indenture allows:

A. a bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.

B. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a specified amount.

C. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.

D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.

E. the issuer to suspend interest payments for any year in which the interest expense exceeds the net income of the firm.

70. If you want to sell a bond issued by a smaller corporation, you:

A. can always do so quite easily by trading it on the New York Stock Exchange.

B. may encounter difficulties in executing the trade.

C. can usually do so quite efficiently due to the high liquidity of the bond market.

D. can do so quite quickly due to the high volume of trading in the bond markets.

E. will most likely trade in an auction market, such as the New York Stock Exchange.

71. One basis point is equal to:

A. .01 percent.

B. .10 percent.

C. 1.0 percent.

D. 10 percent.

E. 100 percent.

72. The EST SPREAD shown in The Wall Street Journal listing of corporate bonds represents the estimated:

A. yield to maturity.

B. difference between the current yield and the yield to maturity.

C. difference between the bonds yield and the yield of a particular Treasury issue.

D. range of yields to maturity provided by the bond over its life to date.

E. difference between the yield to call and the yield to maturity.

73. A Treasury bond that is quoted at 100:07 is selling:

A. at 7 percent over the face amount.

B. at a 7 percent discount.

C. at a 7 percent premium.

D. at par and pays a 7 percent coupon.

E. for about $2.19 over face value.

74. As of 2004, the longest maturity Treasury security currently being issued is the:

A. 5-year note.

B. 10-year note.

C. 15-year bond.

D. 20-year bond.

E. 30-year bond.

75. A Treasury bond has an asked quote of 100:12 and a bid quote of 100:11. One bond:

A. can be purchased at a price of $1,003.75.

B. can be sold at a price of $1,003.75.

C. has a spread of 10 basis points.

D. has a yield to maturity that lies between 11 and 12 percent.

E. can be sold to a dealer at a price of $1,001.10.

76. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays interest on February 1 and August 1. The price you will pay to purchase this bond is equal to the:

A. clean price.

B. muddy price.

C. dirty price.

D. par value price.

E. bid price.

77. The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.

A. inflated

B. realized

C. nominal

D. real

E. risk-free

78. The Fisher formula is expressed as:

A. 1 + r = (1 + R) (1 + h).

B. 1 + r = (1 + R) x (1 + h).

C. 1 + h = (1 + r) (1 + R).

D. 1 + R = (1 + r) (1 + h).

E. 1 + R = (1 + r) x (1 + h).

79. The Fisher Effect primarily emphasizes the effects of _____ risk on an investors rate of return.

A. default

B. market

C. interest rate

D. inflation

E. maturity

80. The term structure of interest rates reflects the:

A. pure time value of money for various lengths of time.

B. actual risk premium being paid for corporate bonds of varying maturities.

C. pure inflation adjustment applied to bonds of various maturities.

D. interest rate risk premium applicable to bonds of varying maturities.

E. nominal interest rates applicable to coupon bonds of varying maturities.

81. Which of the following statements are correct concerning the term structure of interest rates?
I. The outlook for future inflation influences the shape of the term structure of interest rates.
II. The term structure of interest rates includes only the real rate of return and the inflation premium.
III. The interest rate risk premium is included in the term structure of interest rates.
IV. The term structure of interest rates can be downsloping.

A. I and II only

B. II and IV only

C. III and IV only

D. I, III, and IV only

E. I, II, and IV only

82. Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:

A. interest rate risk and time value of money.

B. time value of money and inflation.

C. taxes and potential default.

D. taxes and inflation.

E. inflation and interest rate risk.

83. The bonds issued by Jensen and Son bear a 6 percent coupon, payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?

A. 5.87 percent

B. 5.97 percent

C. 6.00 percent

D. 6.09 percent

E. 6.17 percent

84. A General Co. bond has an 8 percent coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

A. 7.79 percent

B. 7.82 percent

C. 8.00 percent

D. 8.04 percent

E. 8.12 percent

85. Winston Enterprises has a 15-year bond issue outstanding that pays a 9 percent coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?

A. 8.67 percent

B. 10.13 percent

C. 10.16 percent

D. 10.40 percent

E. 10.45 percent

86. Wine and Roses, Inc. offers a 7 percent coupon bond with semiannual payments and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?

A. $953.28

B. $953.88

C. $1,108.16

D. $1,401.26

E. $1,401.86

87. Party Time, Inc. has a 6 percent coupon bond that matures in 11 years. The bond pays interest semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is 12.9 percent?

A. $434.59

B. $580.86

C. $600.34

D. $605.92

E. $947.87

88. Gugenheim, Inc. offers a 7 percent coupon bond with annual payments. The yield to maturity is 5.85 percent and the maturity date is 9 years. What is the market price of a $1,000 face value bond?

A. $742.66

B. $868.67

C. $869.67

D. $1,078.73

E. $1,079.59

89. The Lo Sun Corporation offers a 6 percent bond with a current market price of $875.05. The yield to maturity is 7.34 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

A. 16 years

B. 18 years

C. 24 years

D. 30 years

E. 36 years

90. High Noon Sun, Inc. has a 5 percent, semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29 percent. How many years is it until this bond matures?

A. 4.0 years

B. 4.5 years

C. 6.5 years

D. 8.0 years

E. 9.0 years

91. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8 percent. What is the current market price of a $1,000 face value bond?

A. $430.24

B. $473.26

C. $835.56

D. $919.12

E. $1,088.00

92. Teds Co. offers a zero coupon bond with an 11.3 percent yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?

A. $178.78

B. $180.33

C. $188.36

D. $190.09

E. $192.18

93. The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87 percent. How many years is it until this bond matures?

A. 7 years

B. 10 years

C. 14 years

D. 18 years

E. 21 years

94. A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield rises to 6 percent from the current yield of 4.5 percent?

A. 11.11 percent decrease

B. 12.38 percent decrease

C. 12.38 percent increase

D. 14.13 percent decrease

E. 14.13 percent increase

95. Jackson Central has a 6-year, 8 percent annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year, 8 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6 percent. Which of the following statements are correct if the market yield increases to 7 percent?

A. Both bonds would decrease in value by 4.61 percent.

B. The Earls bond will increase in value by $88.25.

C. The Jackson bond will increase in value by 4.61 percent.

D. The Earls bond will decrease in value by 7.56 percent.

E. The Earls bond will decrease in value by $50.68.

96. DAngelos bonds have a face value of $1,000 and a current market price of $1010. The bonds have a 7 percent coupon rate. What is the current yield on these bonds?

A. 6.93 percent

B. 6.97 percent

C. 7.00 percent

D. 7.03 percent

E. 7.07 percent

97. Mitzis, II. Bonds offer a 6 percent coupon at a current market price of $989. The bonds have a face value of $1,000 and a call price of $1,020. What is the current yield on these bonds?

A. 5.88 percent

B. 5.97 percent

C. 6.00 percent

D. 6.07 percent

E. 6.12 percent

98. The bonds offered by Leos Pumps are callable in 3 years at a quoted price of 101. What is the amount of the call premium on a $1,000 par value bond?

A. $3.33

B. $5.00

C. $10.00

D. $13.33

E. $100.00

99. A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a $1,000 face value?

A. $1,000.28

B. $1,002.77

C. $1,027.67

D. $1,102.77

E. $1,276.70

100. A $1,000 face value zero coupon bond is quoted at a price of 43.30. What is the amount you would pay to purchase this bond?

A. $43.30

B. $430.30

C. $433.00

D. $956.70

E. $1,043.30

101. A Treasury bond is quoted at a price of 106:13. What is the market price of this bond if the face value is $1,000?

A. $106.13

B. $1,064.06

C. $1,106.13

D. $1,106.41

E. $1,106.64

102. A Treasury bond is quoted at a price of 101:00 with a current yield of 5.94 percent. What is the coupon rate?

A. 5.88 percent

B. 5.94 percent

C. 6.00 percent

D. 6.06 percent

E. 6.88 percent

103. A corporate bond is quoted at a price of 98.625 with a 7.875 coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

A. 7.50 percent

B. 7.76 percent

C. 7.88 percent

D. 7.97 percent

E. 7.98 percent

104. A Treasury bond is quoted at a price of 103:23 with a 4.625 coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

A. 4.46 percent

B. 4.54 percent

C. 4.63 percent

D. 4.68 percent

E. 4.74 percent

105. A Treasury bond is quoted as 101:18 asked and 101:16 bid. What is the bid-ask spread in dollars on a $1,000 face value bond?

A. $.02

B. $.20

C. $.625

D. $2.00

E. $6.25

106. The semiannual, ten-year bonds of Adep, Inc. are selling at par and have an effective annual yield of 4.295 percent. What is the amount of each interest payment on a $1,000 Adep bond?

A. $21.25

B. $21.48

C. $21.50

D. $42.50

E. $42.95

107. A bond that pays interest annually yields a 7.25 percent rate of return. The inflation rate for the same period is 3.5 percent. What is the real rate of return on this bond?

A. 3.50 percent

B. 3.57 percent

C. 3.62 percent

D. 3.72 percent

E. 3.75 percent

108. The bonds of Franks Welding, Inc. pay an 8 percent coupon, have a 7.98 percent yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5 percent. What is the real rate of return on these bonds?

A. 5.32 percent

B. 5.35 percent

C. 5.37 percent

D. 5.42 percent

E. 5.48 percent

109. The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.6 percent. The current rate of inflation is 2.5 percent. What is the nominal rate of return on these bonds?

A. 6.10 percent

B. 6.13 percent

C. 6.16 percent

D. 6.19 percent

E. 6.22 percent

110. The nominal rate of return on the bonds of Stus Boats is 8.75 percent. The real rate of return is 3.4 percent. What is the rate of inflation?

A. 5.17 percent

B. 5.28 percent

C. 5.35 percent

D. 5.43 percent

E. 5.49 percent

111. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bonds life?

A. $9.08

B. $12.56

C. $14.48

D. $21.47

E. $31.25

112. The MerryWeather Firm wants to raise $10 million to expand their business. To accomplish this, they plan to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6 percent. What is the minimum number of bonds they must sell to raise the $10 million they need?

A. 47,411

B. 52,667

C. 57,435

D. 60,000

E. 117,435

113. Draw a graph of a typical Treasury yield curve and discuss why it usually takes that shape.

114. Explain why some bond investors are subject to liquidity risk, default risk, and/or taxability risk. How do each of these risks affect the yield of a bond?

115. Explain what a crossover bond is and the risks and expected rewards for investors when they purchase such bonds.

116. Define what is meant by interest rate risk. Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall. What adjustments should you make to your portfolio based on your beliefs?

117. Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?

118. In the early 1980s, the Treasury yield curve had a severe downward slope with short-term yields near 20% and long-term yields below 15%. Explain how such a pattern might occur.

119. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk and how it is related to the movements of a teeter-totter.

120. The discussion of asset pricing in the text suggests that an investor will be indifferent between two bonds which have equal yields to maturity as long as they have equivalent default risk. Can you think of any real-world factors which might make a given investor prefer one of these bonds over the other?

7 Key

1. The stated interest payment, in dollars, made on a bond each period is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

Ross 007 Chapter #1
Topic: COUPON
Type: Definition

2. The principal amount of a bond that is repaid at the end of the loan term is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

Ross 007 Chapter #2
Topic: FACE VALUE
Type: Definition

3. The specified date on which the principal amount of a bond is repaid is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

Ross 007 Chapter #3
Topic: MATURITY
Type: Definition

4. The rate of return required by investors in the market for owning a bond is called the:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

Ross 007 Chapter #4
Topic: YIELD TO MATURITY
Type: Definition

5. The annual coupon of a bond divided by its face value is called the bonds:

A. coupon.

B. face value.

C. maturity.

D. yield to maturity.

E. coupon rate.

Ross 007 Chapter #5
Topic: COUPON RATE
Type: Definition

6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

A. par value

B. discount

C. premium

D. zero coupon

E. floating rate

Ross 007 Chapter #6

7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

A. par

B. discount

C. premium

D. zero coupon

E. floating rate

Ross 007 Chapter #7
Topic: DISCOUNT BONDS
Type: Definition

8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

A. par

B. discount

C. premium

D. zero coupon

E. floating rate

Ross 007 Chapter #8
Topic: PREMIUM BONDS
Type: Definition

9. The unfunded debt of a firm is generally understood to mean the firms:

A. preferred stock.

B. debts that mature in more than one year.

C. debentures.

D. debts that mature in less than one year.

E. secured debt.

Ross 007 Chapter #9
Topic: UNFUNDED DEBT
Type: Definition

10. The written, legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is called the:

A. indenture.

B. covenant.

C. terms of trade.

D. form 5140.

E. call provision.

Ross 007 Chapter #10
Topic: INDENTURE
Type: Definition

11. The form of bond issue in which the registrar of the company records ownership of each bond, with relevant payments made directly to the owner of record, is called the _____ form.

A. new-issue

B. registered

C. bearer

D. debenture

E. collateral

Ross 007 Chapter #11
Topic: REGISTERED BONDS
Type: Definition

12. The form of bond issue in which the bond is issued without record of the owners name, with relevant payments made directly to whoever physically holds the bond, is called the _____ form.

A. new-issue

B. registered

C. bearer

D. debenture

E. collateral

Ross 007 Chapter #12
Topic: BEARER BONDS
Type: Definition

13. The unsecured debts of a firm with maturities greater than 10 years are most literally called:

A. unfunded liabilities.

B. sinking funds.

C. bonds.

D. notes.

E. debentures.

Ross 007 Chapter #13
Topic: DEBENTURES
Type: Definition

14. The unsecured debts of a firm with maturities less than 10 years are most literally called:

A. unfunded liabilities.

B. sinking funds.

C. bonds.

D. notes.

E. debentures.

Ross 007 Chapter #14
Topic: NOTES
Type: Definition

15. In the event of default, _____ debt holders must give preference to more _____ debt holders in the priority of repayment distributions.

A. short-term; long-term

B. long-term; short-term

C. senior; junior

D. senior; subordinated

E. subordinated; senior

Ross 007 Chapter #15
Topic: SENIORITY
Type: Definition

16. An account managed by the bond trustee for early bond redemption payments is called a:

A. sinking fund.

B. collateral payment account.

C. deed in trust account.

D. call provision.

E. par value fund.

Ross 007 Chapter #16
Topic: SINKING FUND
Type: Definition

17. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision.

A. sinking fund

B. call

C. seniority

D. collateral

E. trustee

Ross 007 Chapter #17
Topic: CALL PROVISION
Type: Definition

18. The amount by which the call price exceeds the bonds par value is the:

A. coupon rate.

B. redemption value.

C. call premium.

D. original-issue discount.

E. call rate.

Ross 007 Chapter #18
Topic: CALL PREMIUM
Type: Definition

19. A deferred call provision refers to the:

A. open market price of a callable bond on a certain date.

B. seniority of callable bonds to noncallable bonds in the event of corporate default.

C. prohibition of a company from ever redeeming callable bonds.

D. prohibition of a company from redeeming callable bonds prior to a certain date.

E. amount by which the call price for a callable bond exceeds its par value.

Ross 007 Chapter #19
Topic: DEFERRED CALL PROVISION
Type: Definition

20. Parts of the indenture limiting certain actions that might be taken during the term of the loan to protect the interests of the lender are called:

A. trustee relationships.

B. sinking funds provisions.

C. bond ratings.

D. deferred call provisions.

E. protective covenants.

Ross 007 Chapter #20
Topic: PROTECTIVE COVENANT
Type: Definition

21. The long-term bonds issued by the United States government are called _____ bonds.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

Ross 007 Chapter #21
Topic: TREASURY BONDS
Type: Definition

22. The long-term bonds issued by state and local governments in the United States are called _____ bonds.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

Ross 007 Chapter #22
Topic: MUNICIPAL BONDS
Type: Definition

23. A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

Ross 007 Chapter #23
Topic: ZERO COUPON BONDS
Type: Definition

24. A bond that pays a variable amount of coupon interest over time is called a _____ bond.

A. Treasury

B. municipal

C. floating-rate

D. junk

E. zero coupon

Ross 007 Chapter #24
Topic: FLOATING-RATE BONDS
Type: Definition

25. A bond which, at the election of the holder, can be swapped for a fixed number of shares of common stock at any time prior to the bonds maturity is called a _____ bond.

A. zero coupon

B. callable

C. putable

D. convertible

E. warrant

Ross 007 Chapter #25
Topic: CONVERTIBLE BONDS
Type: Definition

26. A financial market is _____ if it is possible to easily observe its prices and trading volume.

A. transparent

B. open

C. ordered

D. in equilibrium

E. chaotic

Ross 007 Chapter #26
Topic: PRICE TRANSPARENCY
Type: Definition

27. The annual coupon payment of a bond divided by its market price is called the:

A. coupon rate.

B. current yield.

C. yield to maturity.

D. bid-ask spread.

E. capital gains yield.

Ross 007 Chapter #27
Topic: CURRENT YIELD
Type: Definition

28. The price a dealer is willing to pay for a security held by an investor is called the:

A. equilibrium price.

B. ask price.

C. bid price.

D. bid-ask spread.

E. auction price.

Ross 007 Chapter #28
Topic: BID PRICES
Type: Definition

29. The price a dealer is willing to accept for selling a security to an investor is called the:

A. equilibrium price.

B. auction price.

C. bid price.

D. ask price.

E. bid-ask spread.

Ross 007 Chapter #29
Topic: ASK PRICES
Type: Definition

30. Interest rates or rates of return on investments that have not been adjusted for the effects of inflation are called _____ rates.

A. coupon

B. stripped

C. effective

D. real

E. nominal

Ross 007 Chapter #30
Topic: NOMINAL RATES
Type: Definition

31. Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

A. real

B. nominal

C. effective

D. stripped

E. coupon

Ross 007 Chapter #31
Topic: REAL RATES
Type: Definition

32. The relationship between nominal rates, real rates, and inflation is known as the:

A. Miller and Modigliani theorem.

B. Fisher effect.

C. Gordon growth model.

D. term structure of interest rates.

E. interest rate risk premium.

Ross 007 Chapter #32
Topic: FISHER EFFECT
Type: Definition

33. The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:

A. liquidity effect.

B. Fisher effect.

C. term structure of interest rates.

D. inflation premium.

E. interest rate risk premium.

Ross 007 Chapter #33
Topic: TERM STRUCTURE OF INTEREST RATES
Type: Definition

34. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk

Ross 007 Chapter #34
Topic: INFLATION PREMIUM
Type: Definition

35. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

A. default risk

B. taxability

C. liquidity

D. inflation

E. interest rate risk

Ross 007 Chapter #35
Topic: DEFAULT RISK PREMIUM
Type: Definition

36. A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

A. $1,007; $70

B. $1,070; $35

C. $1,070; $70

D. $1,000; $35

E. $1,000; $70

Ross 007 Chapter #36
Topic: BOND FEATURES
Type: Concept

37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

A. a premium; higher than

B. a premium; equal to

C. at par; higher than

D. at par; less than

E. a discount; higher than

Ross 007 Chapter #37
Topic: BOND PRICES AND YIELDS
Type: Concept

38. All else constant, a coupon bond that is selling at a premium, must have:

A. a coupon rate that is equal to the yield to maturity.

B. a market price that is less than par value.

C. semi-annual interest payments.

D. a yield to maturity that is less than the coupon rate.

E. a coupon rate that is less than the yield to maturity.

Ross 007 Chapter #38
Topic: BOND PRICES AND YIELDS
Type: Concept

39. The market price of a bond is equal to the present value of the:

A. face value minus the present value of the annuity payments.

B. annuity payments plus the future value of the face amount.

C. face value plus the present value of the annuity payments.

D. face value plus the future value of the annuity payments.

E. annuity payments minus the face value of the bond.

Ross 007 Chapter #39
Topic: BOND PRICES
Type: Concept

40. As the yield to maturity increases, the:

A. amount the investor is willing to pay to buy a bond decreases.

B. longer the time to maturity.

C. lower the coupon rate desired by that investor.

D. higher the price the investor offers to buy a bond.

E. lower the rate of return desired by the investor.

Ross 007 Chapter #40
Topic: BOND PRICES
Type: Concept

41. American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.

A. I and II only

B. II and III only

C. II, III, and IV only

D. I, II, and III only

E. I, III, and IV only

Ross 007 Chapter #41
Topic: SEMIANNNUAL BONDS
Type: Concept

42. The newly issued bonds of the Wynslow Corp. offer a 6 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

A. equal to 3 percent.

B. greater than 3 percent but less than 4 percent.

C. equal to 6 percent.

D. greater than 6 percent but less than 7 percent.

E. equal to 12 percent.

Ross 007 Chapter #42
Topic: SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RA
Type: Concept

43. Which one of the following statements is correct concerning interest rate risk as it relates to bonds, all else equal?

A. The shorter the time to maturity, the greater the interest rate risk.

B. The higher the coupon rate, the greater the interest rate risk.

C. For a bond selling at par value, there is no interest rate risk.

D. The greater the number of semiannual interest payments, the greater the interest rate risk.

E. The lower the amount of each interest payment, the lower the interest rate risk.

Ross 007 Chapter #43
Topic: INTEREST RATE RISK
Type: Concept

44. Which one of the following bonds has the greatest interest rate risk?

A. 5-year; 9 percent coupon

B. 5-year; 7 percent coupon

C. 7-year; 7 percent coupon

D. 9-year; 9 percent coupon

E. 9-year; 7 percent coupon

Ross 007 Chapter #44
Topic: INTEREST RATE RISK
Type: Concept

45. Interest rate risk _____ as the time to maturity increases.

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

Ross 007 Chapter #45
Topic: INTEREST RATE RISK
Type: Concept

46. You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:

A. the bond issuer to increase the amount of each interest payment on these bonds.

B. the yield to maturity to remain constant due to the fixed coupon rate.

C. to realize a capital loss if you sold the bond at the market price today.

D. todays market price to exceed the face value of the bond.

E. the current yield today to be less than 7 percent.

Ross 007 Chapter #46
Topic: INTEREST RATE RISK
Type: Concept

47. You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase _____ bonds.

A. short-term; low coupon

B. short-term; high coupon

C. long-term; zero coupon

D. long-term; low coupon

E. long-term; high coupon

Ross 007 Chapter #47
Topic: INTEREST RATE RISK
Type: Concept

48. All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____

A. increases; increases.

B. increases; decreases.

C. remains constant; increases.

D. decreases; increases.

E. decreases; decreases.

Ross 007 Chapter #48
Topic: YIELD TO MATURITY AND CURRENT YIELD
Type: Concept

49. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principle is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.

A. II only

B. I and II only

C. III and IV only

D. II and IV only

E. II, III, and IV only

Ross 007 Chapter #49
Topic: BOND FEATURES
Type: Concept

50. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. protective covenants

A. I and II only

B. II and IV only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

Ross 007 Chapter #50
Topic: BOND INDENTURE
Type: Concept

51. Which one of the following statements is correct concerning bond classifications?

A. A debenture is a long-term bond secured by the fixed assets of a firm.

B. A mortgage security is a bond issued solely by a home builder.

C. A note is a bond which has an original maturity date longer than 10 years.

D. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.

E. A callable bond can be repurchased by the issuer prior to the initial maturity date.

Ross 007 Chapter #51
Topic: BOND CLASSIFICATIONS
Type: Concept

52. Callable bonds generally:

A. allow the bondholder to decide when the bond is to be called.

B. are associated with sinking funds.

C. permit the issuer to repurchase the bonds at a discount.

D. are called within the first couple of years after issuance.

E. are required to have a deferred call provision if they have a make-whole call provision.

Ross 007 Chapter #52
Topic: CALLABLE BONDS
Type: Concept

53. Which of the following is a (are) positive covenant(s) that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.

A. I only

B. I and II only

C. I and IV only

D. II and IV only

E. I, II, and IV only

Ross 007 Chapter #53
Topic: PROTECTIVE COVENANTS
Type: Concept

54. Protective covenants:

A. are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.

B. are consistent for all bonds issued by a corporation within the United States.

C. are limited to stating actions which a firm must take.

D. only apply to bonds that have a deferred call provision.

E. are primarily designed to protect bondholders from future actions of the bond issuer.

Ross 007 Chapter #54
Topic: PROTECTIVE COVENANTS
Type: Concept

55. Which one of the following statements concerning bond ratings is correct?

A. Standard and Poors and Value Line are the primary bond rating agencies.

B. Bond ratings are solely an assessment of the creditworthiness of the bond issuer.

C. Investment grade bonds include only those bonds receiving one of the highest three bond ratings.

D. Bond ratings evaluate the expected price volatility of a bond issue.

E. All bonds receive the same rating classification from all rating agencies.

Ross 007 Chapter #55
Topic: BOND RATINGS
Type: Concept

56. A fallen angel is a bond that:

A. lowered its annual interest payment.

B. has moved from being a long-term obligation to being a short-term obligation.

C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate.

D. has moved from being an investment-grade bond to being a junk bond.

E. is rated as Ba by one rating agency and rated as BB by another rating agency.

Ross 007 Chapter #56
Topic: BOND RATINGS
Type: Concept

57. Bonds issued by the U.S. government:
I. are considered to be free of default risk.
II. are considered to be free of interest rate risk.
III. provide totally tax-free income.
IV. pay interest that is exempt from federal income taxes.

A. I only

B. I and III only

C. I and IV only

D. II and III only

E. II and IV only

Ross 007 Chapter #57
Topic: TREASURY BONDS
Type: Concept

58. Treasury bonds are:

A. those bonds 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. preferred by high-income individuals because they offer the best tax benefits.

D. generally issued as coupon bonds.

E. totally risk-free.

Ross 007 Chapter #58
Topic: TREASURY BONDS
Type: Concept

59. Municipal bonds:

A. offer income tax advantages to individuals.

B. generally pay a higher rate of return than corporate bonds.

C. are those bonds issued only by local municipalities, such as a city or a borough.

D. are rarely callable.

E. pay interest that is always exempt from both federal and state income taxes.

Ross 007 Chapter #59
Topic: MUNICIPAL BONDS
Type: Concept

60. The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

A. .07 (1 t*) = .05.

B. .05 (1 t*) = .07.

C. .07 + (1 t*) = .05.

D. .07 x (1 t*) = .05.

E. .05 x (1 t*) = .07.

Ross 007 Chapter #60
Topic: TAXABLE VERSUS MUNICIPAL BONDS
Type: Concept

61. A zero coupon bond:

A. is sold at a large premium.

B. has a price equal to the future value of the face amount given a specified rate of return.

C. can only be issued by the U.S. Treasury.

D. has less interest rate risk than a comparable coupon bond.

E. has implicit interest which is calculated by amortizing the loan.

Ross 007 Chapter #61
Topic: ZERO COUPON BONDS
Type: Concept

62. The total interest paid on a zero-coupon bond is equal to:

A. zero.

B. the face value minus the issue price.

C. the face value minus the market price on the maturity date.

D. $1,000 minus the face value.

E. $1,000 minus the par value.

Ross 007 Chapter #62
Topic: ZERO COUPON BONDS
Type: Concept

63. 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.

Ross 007 Chapter #63
Topic: FLOATING-RATE BONDS
Type: Concept

64. Which of the following are common characteristics of floating-rate bonds?
I. adjustable coupon rates
II. adjustable maturity dates
III. put provision
IV. coupon cap

A. I and II only

B. II and III only

C. I, II, and IV only

D. I, III, and IV only

E. I, II, III, and IV

Ross 007 Chapter #64
Topic: FLOATING-RATE BONDS
Type: Concept

65. A corporation is more prone to issue floating-rate bonds when they expect future interest rates to _____ over the life of the bond.

A. remain constant

B. increase briefly and then decline slightly

C. continually decline

D. decline briefly and then increase significantly

E. continually increase

Ross 007 Chapter #65
Topic: FLOATING RATE BONDS
Type: Concept

66. Cat bonds are primarily designed to help:

A. cities recover from economic recessions.

B. corporations recover from overseas competition.

C. the federal government cope with huge deficits.

D. animal food producers raise capital to compete internationally.

E. insurance companies recover from natural disasters.

Ross 007 Chapter #66
Topic: CATASTROPHE BONDS
Type: Concept

67. Investors generally tend to buy:

A. Treasury bonds for their high yields.

B. municipal bonds for their high yields.

C. convertible bonds for their potential price appreciation.

D. corporate bonds for their liquidity.

E. Treasury bonds for their preferential tax treatment.

Ross 007 Chapter #67
Topic: TYPES OF BONDS AND INVESTOR PREFERENCES
Type: Concept

68. A convertible bond is a bond that can be:

A. exchanged for cash at prescribed points in time.

B. exchanged for a stated number of shares of common stock of the bond issuer.

C. modified from a fixed coupon bond into a floating coupon bond at prescribed points in time.

D. submitted to the issuer for redemption at the discretion of the bondholder.

E. submitted for payment any time the economy converts into a recessionary period.

Ross 007 Chapter #68
Topic: TYPES OF BONDS
Type: Concept

69. A put provision in a bond indenture allows:

A. a bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.

B. a bondholder to force the issuer to increase the cou

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