Question 1

Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.

Accepted Answer

A)  annual 
B)  semiannual 
C)  quarterly 
D)  monthly 
A)  annual 
B)  semiannual 
C)  quarterly 
D)  monthly

Question 2

Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is not true regarding zero-coupon bonds?

Accepted Answer

A)  They are issued at a deep discount from par value. 
B)  Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. 
C)  The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. 
D)  Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. 
E)  All of the above are true. 
A)  They are issued at a deep discount from par value. 
B)  Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. 
C)  The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. 
D)  Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. 
E)  All of the above are true.

Question 4

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.

Accepted Answer

A) True 
 B)False

Question 5

A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.

Accepted Answer

A) True 
 B)False

Question 6

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

Accepted Answer

A)  Competitive 
B)  Noncompetitive 
C)  Negotiable 
D)  Non-negotiable 
A)  Competitive 
B)  Noncompetitive 
C)  Negotiable 
D)  Non-negotiable

Question 7

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

Accepted Answer

A)  remain unchanged 
B)  fall 
C)  rise 
D)  none of the above 
A)  remain unchanged 
B)  fall 
C)  rise 
D)  none of the above

Question 8

The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.

Accepted Answer

A) True 
 B)False

Question 9

Treasury bond dealers

Accepted Answer

A)  quote an ask price for customers who want to sell existing Treasury bonds to the dealers. 
B)  profit from a very wide spread between bid and ask prices in the Treasury securities market. 
C)  may trade Treasury bonds among themselves. 
D)  make a primary market for Treasury bonds. 
A)  quote an ask price for customers who want to sell existing Treasury bonds to the dealers. 
B)  profit from a very wide spread between bid and ask prices in the Treasury securities market. 
C)  may trade Treasury bonds among themselves. 
D)  make a primary market for Treasury bonds.

Question 10

Savings bonds are bonds issued by the Federal Reserve.

Accepted Answer

A) True 
 B)False

Question 11

Treasury bond auctions are normally conducted only at the beginning of each year.

Accepted Answer

A) True 
 B)False

Question 12

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based onthis information, the coupon payment after six months will be $____.

Accepted Answer

A)  250 
B)  255 
C)  500 
D)  510 
A)  250 
B)  255 
C)  500 
D)  510

Question 13

Leveraged buyouts are commonly financed by the issuance of:

Accepted Answer

A)  money market securities. 
B)  Treasury bonds. 
C)  corporate bonds. 
D)  municipal bonds. 
A)  money market securities. 
B)  Treasury bonds. 
C)  corporate bonds. 
D)  municipal bonds.

Question 14

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market valueofyour bonds will likely ____ as a result.

Accepted Answer

A)  rise 
B)  decline 
C)  be zero 
D)  be unaffected 
A)  rise 
B)  decline 
C)  be zero 
D)  be unaffected

Question 15

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

Accepted Answer

A)  decline; more 
B)  decline; less 
C)  increase; more 
D)  none of the above 
A)  decline; more 
B)  decline; less 
C)  increase; more 
D)  none of the above

Question 16

The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk.

Accepted Answer

A) True 
 B)False

Question 17

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 yearsremaining until maturity. Erin's yield to maturity is ____ percent.

Accepted Answer

A)  9.96 
B)  10 
C)  10.33 
D)  10.24 
E)  none of the above 
A)  9.96 
B)  10 
C)  10.33 
D)  10.24 
E)  none of the above

Question 18

The issuance of municipal securities is regulated by:

Accepted Answer

A)  the Securities and Exchange Commission. 
B)  the Consumer Financial Protection Bureau. 
C)  their respective state governments. 
D)  the Federal Reserve. 
A)  the Securities and Exchange Commission. 
B)  the Consumer Financial Protection Bureau. 
C)  their respective state governments. 
D)  the Federal Reserve.

Question 19

Which of the following is not an advantage of online bond brokerage services?

Accepted Answer

A)  Pricing is more transparent because investors can easily compare bid and ask spreads. 
B)  Some services charge commissions, which may be more easily understood than bid and ask spreads. 
C)  Some brokers have narrowed their spreads so that they do not lose business to competitors. 
D)  All of the above are advantages of online bond brokerage services. 
A)  Pricing is more transparent because investors can easily compare bid and ask spreads. 
B)  Some services charge commissions, which may be more easily understood than bid and ask spreads. 
C)  Some brokers have narrowed their spreads so that they do not lose business to competitors. 
D)  All of the above are advantages of online bond brokerage services.

Question 20

Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.

Accepted Answer

A) True 
 B)False

Exam 7: Bond Markets

Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.

Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.

Which of the following is not true regarding zero-coupon bonds?

The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.

A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.

____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.

Treasury bond dealers

Savings bonds are bonds issued by the Federal Reserve.

Treasury bond auctions are normally conducted only at the beginning of each year.

A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based onthis information, the coupon payment after six months will be $____.

Leveraged buyouts are commonly financed by the issuance of:

Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market valueofyour bonds will likely ____ as a result.

If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk.

(Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 yearsremaining until maturity. Erin's yield to maturity is ____ percent.

The issuance of municipal securities is regulated by:

Which of the following is not an advantage of online bond brokerage services?

Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

Pension Fund Operations

Filters

If interest rates suddenly , those existing bonds that have a call feature are likely to be called.