Exam 12: The Bond Market

(I)Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes. (II)Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.

(I)Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II)Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.

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

Governments never issue stock because

Financial guarantees

(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)To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II)The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.

The Commodity Futures Modernization Act (2000)removed derivative securities, such as CDSs, from regulatory oversight. This change opened the door for speculators to bet on the health of a company or pool of assets, and was certainly a culprit in the 2007-2009 financial crisis. Why did Congress pass such legislation?

Compared to money market securities, capital market securities have

Policies that limit the discretion of managers as a way of protecting bondholders' interests are called

A secured bond is backed by

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

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

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

(I)The primary issuers of capital market securities are federal and local governments, and corporations. (II)Governments never issue stock because they cannot sell ownership claims.

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.

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

What is a bond's current yield? How does the current yield differ from the yield to maturity and what determines how close the two values are?

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.

Restrictive covenants can