Question 1

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 2

The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is

Accepted Answer

A) 5%. 
B) 10%. 
C) 12%. 
D) 15%. 
A) 5%. 
B) 10%. 
C) 12%. 
D) 15%.

Question 3

To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.

Accepted Answer

A) risen; lower 
B) risen; raise 
C) fallen; lower 
D) risen; inflate 
A) risen; lower 
B) risen; raise 
C) fallen; lower 
D) risen; inflate

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

(I)Firms and individuals use the capital markets for long-term investments. (II)Capital markets provide an alternative to investment in assets such as real estate and gold.

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 6

Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.

Accepted Answer

A) True 
 B)False

Question 7

(I)The coupon rate is the rate of interest that the issuer of the bond must pay. (II)The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.

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 8

(I)In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II)Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.

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 9

(I)Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II)General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.

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 security with the longest maturity is a Treasury

Accepted Answer

A) note. 
B) bond. 
C) acceptance. 
D) bill. 
A) note. 
B) bond. 
C) acceptance. 
D) bill.

Question 11

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 12

Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.

Accepted Answer

A) higher; corporate earnings will be limited by the restrictions 
B) higher; the bonds will be considered safer by bondholders 
C) lower; the bonds will be considered safer by buyers 
D) lower; corporate earnings will be higher with more restrictions in place 
A) higher; corporate earnings will be limited by the restrictions 
B) higher; the bonds will be considered safer by bondholders 
C) lower; the bonds will be considered safer by buyers 
D) lower; corporate earnings will be higher with more restrictions in place

Question 13

Corporations may enter the capital markets because

Accepted Answer

A) they do not have sufficient capital to fund their investment opportunities. 
B) they want to preserve their capital to protect against expected needs. 
C) it is required by the Securities and Exchange Commission (SE
C) . 
D) none of the above. 
A) they do not have sufficient capital to fund their investment opportunities. 
B) they want to preserve their capital to protect against expected needs. 
C) it is required by the Securities and Exchange Commission (SE
C) . 
D) none of the above.

Question 14

Explain the different types of corporate bonds.

Accepted Answer

There are several different types of cor

Question 15

Treasury bonds are subject to ________ risk but are free of ________ risk.

Accepted Answer

A) default; interest-rate 
B) default; underwriting 
C) interest-rate; default 
D) interest-rate; underwriting 
A) default; interest-rate 
B) default; underwriting 
C) interest-rate; default 
D) interest-rate; underwriting

Question 16

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 17

Individuals and households frequently purchase capital market securities through financial institutions such as

Accepted Answer

A) mutual funds. 
B) pension funds. 
C) money market mutual funds. 
D) all of the above. 
E) only A and B of the above. 
A) mutual funds. 
B) pension funds. 
C) money market mutual funds. 
D) all of the above. 
E) only A and B of the above.

Question 18

Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds.

Accepted Answer

A) secured; revenue 
B) secured; general obligation 
C) unsecured; revenue 
D) unsecured; general obligation 
A) secured; revenue 
B) secured; general obligation 
C) unsecured; revenue 
D) unsecured; general obligation

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.

Accepted Answer

A) True 
 B)False

Exam 12: The Bond Market

Which of the following are true for the current yield?

The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is

To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate.

Financial guarantees

(I)Firms and individuals use the capital markets for long-term investments. (II)Capital markets provide an alternative to investment in assets such as real estate and gold.

Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.

(I)The coupon rate is the rate of interest that the issuer of the bond must pay. (II)The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.

(I)In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II)Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.

(I)Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II)General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.

The security with the longest maturity is a Treasury

A firm will borrow long-term

Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________.

Corporations may enter the capital markets because

Explain the different types of corporate bonds.

Treasury bonds are subject to ________ risk but are free of ________ risk.

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.

Individuals and households frequently purchase capital market securities through financial institutions such as

Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds.

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

General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment.

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 Why Are They so Damaging to the Economy

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

Savings Associations and Credit Unions

Finance Companies

Filters

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

Typically, the interest rate on corporate bonds will be the more restrictions are placed on management through restrictive covenants, because .

Treasury bonds are subject to risk but are free of risk.

Corporate bonds are less risky if they are bonds and municipal bonds are less risky if they are bonds.