Question 1

A _____ is assigned to represent the bondholders and to guarantee that the terms of the indenture are carried out.

Accepted Answer

A) federal government agent 
B) trustee 
C) liquidator 
D) negotiator 
E) rating agency

Question 2

Which of the following statements is true about federal funds?

Accepted Answer

A) Federal funds offer loans at a coupon rate that is two times the market interest rate. 
B) Federal funds have very long maturities, often three years or more. 
C) Federal funds offer loans to the state government to meet the reserve requirements of the federal government. 
D) Federal funds are used to repay the T-bills issued by the federal government. 
E) Federal funds are used by banks to meet the reserve requirements of the Federal Reserve.

Question 3

Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue of face value $1,000 to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for five years. Then, interest payments will be resumed for the next five years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first five years will be paid. However, no interest will be paid on the deferred interest. If the required return is 20 percent, what should the bonds sell for in the market today?

Accepted Answer

A) $242.26 
B) $281.69 
C) $578.31 
D) $362.44 
E) $813.69

Question 4

Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

Accepted Answer

A) True 
 B)False

Question 5

The average rate of return earned on a callable bond if it is held until the first call date is the:

Accepted Answer

A) yield to call. 
B) yield to market. 
C) yield to principal price. 
D) yield to issue price. 
E) yield to maturity.

Question 6

Assuming other things are held constant, which of the following is correct?

Accepted Answer

A) The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer maturity periods. 
B) For a bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital gain than the capital loss stemming from an identical decrease in the interest rate. 
C) For any given maturity, a percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical increase in the interest rate. 
D) In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds. 
E) A 20-year bond has more interest rate reinvestment risk than a two-year bond.

Question 7

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

Accepted Answer

A) higher than 
B) lower than 
C) the same as 
D) moving with 
E) unrelated to

Question 8

A bond sinking fund provision requires a firm to:

Accepted Answer

A) issue bonds every year to finance interest payment on bonds. 
B) retire a portion of the bond issue each year. 
C) increase the coupon rate by one percent every year. 
D) use annual interest payments for the repayment of bonds. 
E) gradually reduce the face value of debt to the level of market value of debt.

Question 9

The par value of debt:

Accepted Answer

A) is added to the interest payments to get the maturity value of the debt. 
B) must be repaid at some point during the life of the debt. 
C) is always half of the maturity value of the debt. 
D) is equal to the market value of the debt. 
E) always yields positive returns for investors.

Question 10

An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?

Accepted Answer

A) $1,122.87 
B) $1,003.42 
C) $875.38 
D) $950.75 
E) $877.11

Question 11

The _____ of a bond fluctuates continuously during its life.

Accepted Answer

A) principal value 
B) face value 
C) maturity value 
D) coupon rate 
E) market value

Question 12

A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.)

Accepted Answer

A) True 
 B)False

Question 13

Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock.

Accepted Answer

A) True 
 B)False

Question 14

The greater a bond's default risk, the greater the:

Accepted Answer

A) maturity value of the bond. 
B) chance the firm will exercise the call provision on the bond. 
C) interest rate stability of the bond in the long run. 
D) investment in the bond by risk-averse investors. 
E) default risk premium (DRP) associated with the bond.

Question 15

If a bond's yield to maturity exceeds its coupon rate, the bond's:

Accepted Answer

A) current yield is equal to the coupon rate. 
B) price must be less than its par value. 
C) maturity value is more than its face value. 
D) current yield is equal to the capital gain on the maturity of the bond. 
E) maturity value is less than the bond's market value.

Question 16

Banks that need additional funds to meet the reserve requirements of the Federal Reserve:

Accepted Answer

A) borrow from the state government of the state where their headquarters are located. 
B) borrow from banks with excess reserves. 
C) issue treasury bills to investors. 
D) decrease the coupon interest rate on the bonds issued to raise funds. 
E) exercise the call option on the loans extended to small businesses.

Question 17

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

Accepted Answer

A) 6.05% 
B) 10.00% 
C) 10.06% 
D) 8.59% 
E) 11.26%

Question 18

Which of the following equations is used to compute the percentage rate of return on a bond?

Accepted Answer

A) Percentage rate of return on a bond = Current yield + Coupon rate of interest 
B) Percentage rate of return on a bond = Current yield + Capital gains yield 
C) Percentage rate of return on a bond = Market return + Maturity value 
D) Percentage rate of return on a bond = Market yield + Current yield 
E) Percentage rate of return on a bond = Market yield + Capital gains yield

Question 19

The Securities and Exchange Commission is required to verify that:

Accepted Answer

A) the coupon rate of debt is more than the market interest rate. 
B) all previous indenture provisions have been met before allowing a company to sell new securities to the public. 
C) the market price of debt is more than the principal value of debt. 
D) the face value of debt is more than the maturity value of debt. 
E) the new securities to be sold to the public have a higher coupon rate than all previous security issues.

Question 20

The maturity of commercial paper varies from:

Accepted Answer

A) 10 to 15 months. 
B) two to three years. 
C) one to nine months. 
D) 15 to 18 months. 
E) three to five years.

Exam 6: Bonds Debt Characteristics and Valuation

A _____ is assigned to represent the bondholders and to guarantee that the terms of the indenture are carried out.

Which of the following statements is true about federal funds?

Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in which it is sold.

The average rate of return earned on a callable bond if it is held until the first call date is the:

Assuming other things are held constant, which of the following is correct?

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

A bond sinking fund provision requires a firm to:

The par value of debt:

An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every six months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should the investor pay for it?

The _____ of a bond fluctuates continuously during its life.

A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.)

Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method of financing to a corporation than common stock.

The greater a bond's default risk, the greater the:

If a bond's yield to maturity exceeds its coupon rate, the bond's:

Banks that need additional funds to meet the reserve requirements of the Federal Reserve:

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

Which of the following equations is used to compute the percentage rate of return on a bond?

The Securities and Exchange Commission is required to verify that:

The maturity of commercial paper varies from: