Exam 13: The Bond Market

If a firm repurchases debt at a discount, its net income is increased.

A high yield bond

A call penalty (i.e., call premium)protects the

Federal government bonds are among the least risky bonds because the federal government has the power to tax and print money.

A bond that is traded "flat" has a fixed coupon.

Zero coupon and split coupon bonds

When an investor purchases a bond, that individual receives accrued interest from the seller.

Euro-bonds are denominated in dollars.

Interest on a convertible bond may be exchanged for stock instead of cash.

If a firm repurchases bonds at a discount, the difference between the principal amount and the purchase price produces taxable income.

A bond matures in 2020 and has an annual coupon of 3.65 percent, payable on January 1 and July 1. The current price of the $1,000 bond is $978. On February 1, you purchase $10,000 face amount, and your broker charges a $25 commission. How much must you remit for the purchase?

A $1,000 zero coupon bond matures in five years and sells for $784 to yield 5 percent. The accrued interest for the first year is $39. You are in the 30 percent federal income tax bracket. What is tax owed on the interest if the bond is (a)in your regular personal account or (b)in your Roth retirement account (IRA)?

Default means the failure to meet any of the terms of a bond's indenture.

Bonds pay a flow of income called "interest."

A strong sinking fund makes the bond riskier because it is harder for the firm to retire the debt.

A zero coupon only pays interest when it is sold.

Income taxation on the interest earned from an investment in a zero coupon bond occurs when the bond matures.

When an investor purchases a bond, he or she

Zero coupon bonds

A "fallen angel" was once a quality bond whose issuing firm is currently having financial problems.