Exam 8: Understanding Risk and Market Factors in Financial Securities

By early March 2009, the difference between long-term interest rates on corporate bonds, Baa and the 10 year US treasury notes has decreased to around:

Conversion of a convertible bond into common stock can be reversed; that is, the stock received by the investor can be turned back into convertible bonds according to the indenture provision accompanying most convertible bond issues.

Marketability is generally greater for securities issued in large blocks.

Among the most popular default risk hedging tools today are credit derivatives, which:

Recent research evidence suggests that when interest rates are high, the call premium generally increases.

In March of 2009, Baa bonds were quoted at an average yield of only 3.00 percent.

For bonds the minimum call penalty required is usually one year's worth of coupon income.

Recently, the junk bond market has enjoyed a rally in bond prices and an upward surge in new offerings. Reasons for this include:

Most callable corporate bonds carry call deferments of from 15 to 20 years.

What does the term marketability refer to? Why is it important to the saver and the issuer of a loan or security?

The investment banking firm that pioneered new techniques to sell junk bonds and was instrumental in the rapid growth of the junk-bond market was:

Among the most popular of credit derivatives contracts are credit swaps in which two or more investors in risky loans and securities agree to exchange at least a portion of their expected payments due from the borrowers.

Prepayment risk arises when securities backed by loans are issued.

During a recession the yield spread between Aa-rated and Ba-rated bonds would tend to:

Callable securities usually benefit the issuer over the buyer of the asset.

The interest income from municipal bonds is exempt from federal income taxes.

The interest on convertible bonds is federal income tax deductible for the issuing corporation.

In an efficient market callable securities will sell at a price and yield just sufficient to compensate buyers for call risk.

The difference between the promised yield and the expected yield is the:

Suppose the holder of a $1,000 par-value convertible bond is allowed by the bond's accompanying contract (indenture) to convert the bond into 25 shares of common stock. Today, the stock is selling for $60 a share. What is the bond's conversion value as expressed in terms of the market value of stock received?