Exam 8: Bond Markets

Capital market interest rates tend to be higher than money market rates for a given issuer.

Both governments and businesses issue both debt and equity capital market securities.

Financial guarantees generate interest income for banks and insurers.

Capital market securities are typically used to finance real capital investments.

Most state and local government bonds are sold to investors in low tax brackets.

What types of risks are faced by bond investors?

Lower marginal tax rates increase the demand for municipal securities.

What factors have contributed to the increased globalization of bond markets?

Money market securities are all debt securities, while capital market securities are either debt or equity securities.

You check the Wall Street Journal and find information regarding a principal STRIP that will mature in 7 years. The price quote per hundred of par for this STRIP is 85.75%. Using semiannual compounding, what is the promised yield to maturity on the STRIP?

A U.S. Treasury STRIP is a zero-coupon bond.

Why are U.S. Treasury STRIPs are of interest to individuals with IRA's or $401k pension plans?

Revenue bonds are generally considered more risky than general obligation bonds.

The after-tax return on a 9 percent municipal bond held by a commercial bank in the 34 percent tax bracket is 5.94 percent.

TIPS are designed to primarily protect investors from default risk.

Compare and contrast the characteristics of the securities of the money market with those of the capital market.

A bond's promised yield is inversely related to its default rating, all else equal.

Bondholders may profitably convert their convertible bonds into shares of stock when theconversion price is greater than the market price of the stock.

In 2015 the volume of mortgages outstanding exceeds the volume of corporate bonds in the U.S.

The market where firms and institutions warehouse funds until needed in the near future is called the capital market.