Question 1

Municipal bonds are:

Accepted Answer

A)  generally purchased by tax-exempt investors.
B)  risk-free.
C)  issued by federal, state, and local governmental bodies.
D)  zero coupon bonds.
E)  generally callable.F) C) and E)
G) C) and D)

Question 2

Which one of the following statements is correct?

Accepted Answer

A)  Bonds are generally called at par value.
B)  A current list of all bondholders is maintained whenever a firm issues bearer bonds.
C)  An indenture is a contract between a bond's issuer and its holders.
D)  Collateralized bonds are called debentures.
E)  A bondholder has the right to determine when his or her bond is called.F) A) and E)
G) A) and C)

Question 3

The term structure of interest rates represents the relationship between which of the following?

Accepted Answer

A)  Nominal rates on risk-free and risky bonds
B)  Real rates on risk-free and risky bonds
C)  Nominal and real rates on default-free, pure discount bonds
D)  Market and coupon rates on default-free, pure discount bonds
E)  Nominal rates on default-free, pure discount bonds and time to maturityF) None of the above
G) A) and B)

Question 4

Which one of the following statements concerning sinking funds is correct?

Accepted Answer

A)  Bond issuers must fund a sinking fund at the time the bonds are issued.
B)  Sinking funds must include at least one "balloon payment."
C)  Sinking funds must be funded annually, starting on the issue date.
D)  Sinking funds may be used to purchase bonds in the open market.
E)  Sinking funds can be used only to call bonds.F) A) and D)
G) D) and E)

Question 5

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield on Keyser Materials bonds? The YTM?
The effective annual yield?

Accepted Answer

A)  7.84 percent; 7.80 percent; 7.95 percent
B)  7.84 percent; 7.92 percent; 7.95 percent
C)  7.84 percent; 7.92 percent; 7.97 percent
D)  7.80 percent; 7.84 percent; 7.92 percent
E)  7.80 percent; 7.92 percent; 7.95 percentF) A) and B)
G) A) and C)

Question 6

An upward-sloping term structure of interest rates indicates:

Accepted Answer

A)  the real rate of return is lower for short-term bonds than for long-term bonds.
B)  there is an indirect relationship between real interest rates and time to maturity.
C)  there is an indirect relationship between nominal interest rates and time to maturity.
D)  the nominal rate is declining as the real rate rises as the time to maturity increases.
E)  the nominal rate is increasing even though the real rate is constant as the time to maturity increases.F) A) and C)
G) D) and E)

Question 7

The Dairy Delight wants to raise $1.0 million by selling some coupon bonds at par.Comparable bonds in the market have a 6.5 percent annual coupon,15 years to maturity,and are selling at 98 percent of par.What coupon rate should The Dairy Delight set on its bonds?

Accepted Answer

A)  6.25 percent
B)  6.48 percent
C)  6.50 percent
D)  6.67 percent
E)  6.72 percentF) A) and E)
G) B) and D)

Question 8

The written agreement that contains the specific details related to a bond issue is called the bond:

Accepted Answer

A)  indenture.
B)  debenture.
C)  document.
D)  registration statement.
E)  issue paper.F) B) and D)
G) C) and D)

Question 9

Travis recently purchased a callable bond.However,that bond cannot be currently redeemed by the issuer.Thus,the bond must currently be:

Accepted Answer

A)  subject to a sinking fund provision.
B)  a debenture.
C)  a "fallen angel."
D)  call protected.
E)  unrated.F) C) and E)
G) B) and E)

Question 10

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Accepted Answer

A)  Interest rate risk premium
B)  Inflation premium
C)  Liquidity premium
D)  Taxability premium
E)  Default risk premiumF) None of the above
G) B) and D)

Question 11

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

Accepted Answer

A)  Callable
B)  Income
C)  Zero coupon
D)  Convertible
E)  Tax-freeF) B) and D)
G) B) and E)

Question 12

Generally speaking,bonds issued in the U.S.pay interest on a(n) _____ basis.

Accepted Answer

A)  annual
B)  semiannual
C)  quarterly
D)  monthly
E)  dailyF) A) and C)
G) A) and E)

Question 13

The term structure of interest rates is affected by which of the following?
I.Interest rate risk premium
II.Real rate of interest
III.Default risk premium
IV.Inflation premium

Accepted Answer

A)  I and II only
B)  II and III only
C)  I, III, and IV only
D)  I, II, and IV only
E)  I, II, III, and IVF) B) and D)
G) D) and E)

Question 14

One year ago,Alpha Supply issued 15-year bonds at par.The bonds have a coupon rate of 6.5 percent and pay interest annually.Today,the market rate of interest on these bonds is 7.2 percent.How does the price of these bonds today compare to the issue price?

Accepted Answer

A)  4.99 percent lower
B)  5.38 percent lower
C)  6.05 percent lower
D)  0.07 percent higher
E)  1.36 percent higherF) B) and E)
G) B) and D)

Question 15

The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value.The bonds mature in eight years and pay interest semiannually.These bonds have current yield of _____ percent,a yield to maturity of _____ percent,and an effective annual yield of _____ percent.

Accepted Answer

A)  6.12; 6.32; 6.36
B)  6.12; 6.32; 6.42
C)  6.12; 6.36; 6.42
D)  6.23; 6.32; 6.36
E)  6.23; 6.36; 6.42F) D) and E)
G) None of the above

Question 16

A bond has a $1,000 face value,a market price of $1,045,and pays interest payments of $80 every year.What is the coupon rate?

Accepted Answer

A)  6.76 percent
B)  7.00 percent
C)  7.12 percent
D)  8.00 percent
E)  8.14 percentF) C) and D)
G) A) and B)

Question 17

Manning,Inc.originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.Which one of the following terms applies to this situation?

Accepted Answer

A)  Called bond
B)  Converted bond
C)  Protected covenant
D)  Fallen angel
E)  Floating bondF) All of the above
G) C) and E)

Question 18

Which one of the following is a unique characteristic of an income bond?

Accepted Answer

A)  Interest income is tax-free.
B)  Interest income is paid at the time of issuance.
C)  Coupon payments are dependent on the issuer's income.
D)  Coupon payments are paid on a regular monthly basis.
E)  Coupon payments can be converted into equity shares.F) B) and E)
G) A) and D)

Question 19

A note is a(n) :

Accepted Answer

A)  unsecured debt that is generally payable within the next 10 years.
B)  formal type of loan that is secured by real estate.
C)  long-term debt secured by part, or all, of the assets of the borrower.
D)  debt that is secured by a borrower's accounts receivable.
E)  written agreement that details the information relative to a bond issue.F) All of the above
G) C) and D)

Question 20

Which one of the following premiums is paid on a corporate bond due to its tax status?

Accepted Answer

A)  Interest rate risk premium
B)  Inflation premium
C)  Liquidity premium
D)  Taxability premium
E)  Default risk premiumF) B) and E)
G) D) and E)

Exam 6: Interest Rates and Bond Valuation

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

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An upward-sloping term structure of interest rates indicates:

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Which one of the following premiums is paid on a corporate bond due to its tax status?

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The written agreement that contains the specific details related to a bond issue is called the bond:

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A bond has a $1,000 face value,a market price of $1,045,and pays interest payments of $80 every year.What is the coupon rate?

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The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value.The bonds mature in eight years and pay interest semiannually.These bonds have current yield of _____ percent,a yield to maturity of _____ percent,and an effective annual yield of _____ percent.

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Which one of the following is a unique characteristic of an income bond?

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One year ago,Alpha Supply issued 15-year bonds at par.The bonds have a coupon rate of 6.5 percent and pay interest annually.Today,the market rate of interest on these bonds is 7.2 percent.How does the price of these bonds today compare to the issue price?

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The term structure of interest rates represents the relationship between which of the following?

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Travis recently purchased a callable bond.However,that bond cannot be currently redeemed by the issuer.Thus,the bond must currently be:

Correct AnswerverifiedShow Answer

The Dairy Delight wants to raise $1.0 million by selling some coupon bonds at par.Comparable bonds in the market have a 6.5 percent annual coupon,15 years to maturity,and are selling at 98 percent of par.What coupon rate should The Dairy Delight set on its bonds?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

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Which one of the following statements concerning sinking funds is correct?

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Manning,Inc.originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.Which one of the following terms applies to this situation?

Correct AnswerverifiedShow Answer

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Correct AnswerverifiedShow Answer

The term structure of interest rates is affected by which of the following? I.Interest rate risk premium II.Real rate of interest III.Default risk premium IV.Inflation premium

Correct AnswerverifiedShow Answer

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield on Keyser Materials bonds? The YTM? The effective annual yield?

Correct AnswerverifiedShow Answer

A note is a(n) :

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Municipal bonds are:

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Generally speaking,bonds issued in the U.S.pay interest on a(n) _____ basis.

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The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value.The bonds mature in eight years and pay interest semiannually.These bonds have current yield of ___ percent,a yield to maturity of _ percent,and an effective annual yield of ___ percent.

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