Question 1

A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.

Accepted Answer

A) True 
 B)False

Question 2

STRIPS (Separate Trading of Registered Interest and Principal Securities)are also called

Accepted Answer

A)  interest-based securities. 
B)  zero-coupon securities. 
C)  leveraged securities. 
D)  covenant securities. 
A)  interest-based securities. 
B)  zero-coupon securities. 
C)  leveraged securities. 
D)  covenant securities.

Question 3

What is a callable bond? How does the callability feature affect the bond's price and interest rate?

Accepted Answer

Callable bond: Type of bond which provid

Question 4

Financial guarantees

Accepted Answer

A)  are insurance policies to back bond issues. 
B)  are purchased by financially weaker security issuers. 
C)  lower the risk of the bonds covered by the guarantee. 
D)  do all of the above. 
E)  do only A and B of the above. 
A)  are insurance policies to back bond issues. 
B)  are purchased by financially weaker security issuers. 
C)  lower the risk of the bonds covered by the guarantee. 
D)  do all of the above. 
E)  do only A and B of the above.

Question 5

Distinguish between general obligation and revenue municipal bonds.

Accepted Answer

General obligation bonds do not have a c

Question 6

Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called

Accepted Answer

A)  junk bonds. 
B)  callable bonds. 
C)  convertible bonds. 
D)  debentures. 
A)  junk bonds. 
B)  callable bonds. 
C)  convertible bonds. 
D)  debentures.

Question 7

Which of the following are true for the current yield?

Accepted Answer

A)  The current yield is defined as the yearly coupon payment divided by the price of the security. 
B)  The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. 
C)  The current yield is always a poor approximation for the yield to maturity. 
D)  All of the above are true. 
E)  Only A and B of the above are true. 
A)  The current yield is defined as the yearly coupon payment divided by the price of the security. 
B)  The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. 
C)  The current yield is always a poor approximation for the yield to maturity. 
D)  All of the above are true. 
E)  Only A and B of the above are true.

Question 8

A secured bond is backed by

Accepted Answer

A)  the general creditworthiness of the borrower. 
B)  an insurance company's financial guarantee. 
C)  the expected future earnings of the borrower. 
D)  specific collateral. 
A)  the general creditworthiness of the borrower. 
B)  an insurance company's financial guarantee. 
C)  the expected future earnings of the borrower. 
D)  specific collateral.

Question 9

(I)Securities that have an original maturity greater than one year are traded in capital markets.
(II)The best known capital market securities are stocks and bonds.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 10

The primary issuers of capital market securities are local governments and corporations.

Accepted Answer

A) True 
 B)False

Question 11

In a leveraged buy-out,a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.

Accepted Answer

A) True 
 B)False

Question 12

Capital market securities are less liquid and have longer maturities than money market securities.

Accepted Answer

A) True 
 B)False

Question 13

A financial guarantee ensures that the lender (bond purchaser)will be paid both principal and interest in the event the issuer defaults.

Accepted Answer

A) True 
 B)False

Question 14

The prices of Treasury notes,bonds,and bills are quoted

Accepted Answer

A)  as a percentage of the coupon rate. 
B)  as a percentage of the previous day's closing value. 
C)  as a percentage of $100 face value. 
D)  as a multiple of the annual interest paid. 
A)  as a percentage of the coupon rate. 
B)  as a percentage of the previous day's closing value. 
C)  as a percentage of $100 face value. 
D)  as a multiple of the annual interest paid.

Question 15

To sell an old bond when rates have risen,the holder will have to discount the bond until the yield to the buyer is the same as the market rate.

Accepted Answer

A) True 
 B)False

Question 16

A firm will borrow long-term

Accepted Answer

A)  if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. 
B)  if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. 
C)  if short-term interest rates are expected to decline during the term of the debt. 
D)  if long-term interest rates are expected to decline during the term of the debt. 
A)  if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. 
B)  if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. 
C)  if short-term interest rates are expected to decline during the term of the debt. 
D)  if long-term interest rates are expected to decline during the term of the debt.

Question 17

When an old bond's market value is above its par value,the bond is selling at a ________.This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.

Accepted Answer

A)  premium; below 
B)  premium; above 
C)  discount; below 
D)  discount; above 
A)  premium; below 
B)  premium; above 
C)  discount; below 
D)  discount; above

Question 18

(I)Capital market securities fall into two categories: bonds and stocks.
(II)Long-term bonds include government bonds and long-term notes,municipal bonds,and corporate bonds.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 19

(I)Callable bonds usually have a higher yield than comparable noncallable bonds.
(II)Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 20

Firms and individuals use the money markets primarily to warehouse funds for short
periods of time until a more important need or a more productive use for the funds arises.

Accepted Answer

A) True 
 B)False

Exam 12: The Bond Market

A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.

STRIPS (Separate Trading of Registered Interest and Principal Securities)are also called

What is a callable bond? How does the callability feature affect the bond's price and interest rate?

Financial guarantees

Distinguish between general obligation and revenue municipal bonds.

Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called

Which of the following are true for the current yield?

A secured bond is backed by

(I)Securities that have an original maturity greater than one year are traded in capital markets. (II)The best known capital market securities are stocks and bonds.

The primary issuers of capital market securities are local governments and corporations.

In a leveraged buy-out,a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.

Capital market securities are less liquid and have longer maturities than money market securities.

A financial guarantee ensures that the lender (bond purchaser)will be paid both principal and interest in the event the issuer defaults.

The prices of Treasury notes,bonds,and bills are quoted

To sell an old bond when rates have risen,the holder will have to discount the bond until the yield to the buyer is the same as the market rate.

A firm will borrow long-term

When an old bond's market value is above its par value,the bond is selling at a ________.This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.

(I)Capital market securities fall into two categories: bonds and stocks. (II)Long-term bonds include government bonds and long-term notes,municipal bonds,and corporate bonds.

(I)Callable bonds usually have a higher yield than comparable noncallable bonds. (II)Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds.

Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

When an old bond's market value is above its par value,the bond is selling at a .This occurs because the old bond's coupon rate is the coupon rates of new bonds with similar risk.