Question 1

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

Accepted Answer

A)  Decline 
B)  Remain unchanged 
C)  Rise 
D)  Change in an unpredictable way 
E)  None of the above

Question 2

In recent years marginal tax rates in the 40 to 50 percent range have represented a break-even level for investors interested in municipal bonds.

Accepted Answer

A) True 
 B)False

Question 3

Convertible bonds are issued at a higher interest rate because they are riskier to the corporation issuing them.

Accepted Answer

A) True 
 B)False

Question 4

When economic and financial conditions suggest to investors that uncertainty has increased and business prospects are less robust, the market translates these opinions into lower default-risk premiums.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  Anticipated loss due to the market 
B)  Anticipated inflation rate 
C)  Actual inflation rate 
D)  Liquidity risk premium 
E)  None of the above

Question 6

When interest rates are expected to fall, the spread between corporate and U.S. government bond rates tends to widen due to:

Accepted Answer

A)  Liquidity risk 
B)  Call risk 
C)  Default risk 
D)  Inflation risk 
E)  Exchange risk

Question 7

Common stock is generally a more risky investment than convertible bonds issued by the same company.

Accepted Answer

A) True 
 B)False

Question 8

An investor considering purchasing a bond whose yield to maturity has an 80 percent probability of being 12 percent and a 20 percent probability of being 18 percent. The bond's expected yield is (to the nearest whole percentage point):

Accepted Answer

A)  16 percent 
B)  15 percent 
C)  14 percent 
D)  13 percent 
E)  None of the above

Question 9

Fees for getting a credit rating on a security are usually paid by investors interested in buying the security.

Accepted Answer

A) True 
 B)False

Question 10

Suppose there are 10 possible yields on a risky security and one of those 10 possible yields doubles in size, while a second yield in the set of 10 is cut by half. These two changes taken together are exactly offsetting and the expected yield on the security in question cannot change.

Accepted Answer

A) True 
 B)False

Question 11

While call privileges are, in general, a disadvantage to the investor, they do have greater capital gains potential than non-callable securities.

Accepted Answer

A) True 
 B)False

Question 12

The Orange County, California case is a clear example of what kind of risk in the financial markets?

Accepted Answer

A)  Default risk 
B)  Inflation risk 
C)  Event risk 
D)  Call risk 
E)  None of the above

Question 13

A government subsidy to induce investors to support local government by financing the construction of schools, highways and other needed public projects is:

Accepted Answer

A)  Favorable tax treatment of capital gains 
B)  Tax-exempt municipal securities 
C)  Favorable tax treatment of capital losses 
D)  Personal tax exemptions for individual taxpayers 
E)  None of the above

Question 14

The size of the call penalty paid on a security that has been called generally varies with the level of interest rates in the open market.

Accepted Answer

A) True 
 B)False

Question 15

When market interest rates fall investors in loan-backed securities will experience quicker recovery of their invested funds.

Accepted Answer

A) True 
 B)False

Question 16

The difference between the promised yield and the expected yield on a risky security is the:

Accepted Answer

A)  Anticipated loss due to default 
B)  Market default-risk premium 
C)  Risk-free interest rate 
D)  Yield on a risky security 
E)  None of the above

Question 17

The announcement of a new security issue usually leads the issuer's securities to fall in price, at least temporarily.

Accepted Answer

A) True 
 B)False

Question 18

Among the factors influencing the risk premiums on corporate securities are: volatile earnings, length of time in operation and amount of leverage employed.

Accepted Answer

A) True 
 B)False

Question 19

Marketability of a security is unaffected by the volume of similar securities available.

Accepted Answer

A) True 
 B)False

Question 20

The price at which the yield on a convertible bond matches the yield on nonconvertible bonds of the same quality and credit rating is known as the convertible bond's:

Accepted Answer

A)  Investment premium 
B)  Conversion premium 
C)  Conversion value 
D)  Conversion price 
E)  Investment value

Exam 8: Understanding Risk and Market Factors in Financial Securities

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

In recent years marginal tax rates in the 40 to 50 percent range have represented a break-even level for investors interested in municipal bonds.

Convertible bonds are issued at a higher interest rate because they are riskier to the corporation issuing them.

When economic and financial conditions suggest to investors that uncertainty has increased and business prospects are less robust, the market translates these opinions into lower default-risk premiums.

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

When interest rates are expected to fall, the spread between corporate and U.S. government bond rates tends to widen due to:

Common stock is generally a more risky investment than convertible bonds issued by the same company.

An investor considering purchasing a bond whose yield to maturity has an 80 percent probability of being 12 percent and a 20 percent probability of being 18 percent. The bond's expected yield is (to the nearest whole percentage point) :

Fees for getting a credit rating on a security are usually paid by investors interested in buying the security.

Suppose there are 10 possible yields on a risky security and one of those 10 possible yields doubles in size, while a second yield in the set of 10 is cut by half. These two changes taken together are exactly offsetting and the expected yield on the security in question cannot change.

While call privileges are, in general, a disadvantage to the investor, they do have greater capital gains potential than non-callable securities.

The Orange County, California case is a clear example of what kind of risk in the financial markets?

A government subsidy to induce investors to support local government by financing the construction of schools, highways and other needed public projects is:

The size of the call penalty paid on a security that has been called generally varies with the level of interest rates in the open market.

When market interest rates fall investors in loan-backed securities will experience quicker recovery of their invested funds.

The difference between the promised yield and the expected yield on a risky security is the:

The announcement of a new security issue usually leads the issuer's securities to fall in price, at least temporarily.

Among the factors influencing the risk premiums on corporate securities are: volatile earnings, length of time in operation and amount of leverage employed.

Marketability of a security is unaffected by the volume of similar securities available.

The price at which the yield on a convertible bond matches the yield on nonconvertible bonds of the same quality and credit rating is known as the convertible bond's: