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Finance
Q:
As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds.
a. True
b. False
Q:
International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.
a. True
b. False
Q:
Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.
a. True
b. False
Q:
When two securities have the same expected cash flows, the value of the high-risk security will be higher than the value of the low-risk security.
a. True
b. False
Q:
In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.
a. True
b. False
Q:
Systemic risk could be avoided if all financial institutions would use derivative securities as a means of insuring against the default of the debt securities that they hold.
a. True
b. False
Q:
Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.
a. True
b. False
Q:
The credit risk premium tends to be larger for bonds that have longer terms to maturity.
a. True
b. False
Q:
The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.
a. True
b. False
Q:
The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.
a. True
b. False
Q:
Other things held constant, bond prices should increase when inflationary expectations rise.
a. True
b. False
Q:
If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.
a. True
b. False
Q:
A zero-coupon bond makes no coupon payments.
a. True
b. False
Q:
The credit crisis of 20082009 had substantial effects on the credit risk premiums of bonds issued by U.S. corporations, but bonds issued by corporations based in other countries were largely unaffected.
a. True
b. False
Q:
Duration is a measure of the life of a bond on a present value basis.
a. True
b. False
Q:
Bonds that sell below their par value are called premium bonds.
a. True
b. False
Q:
The appropriate price of a bond is simply the sum of the cash flows to be received.
a. True
b. False
Q:
Indicate whether the statement is true or false.If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.a. Trueb. False
Q:
If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
a. equals; equals
b. exceeds; is less than
c. is less than; is greater than
d. exceeds; is less than AND is less than; is greater than
e. None of these are correct.
Q:
A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds make annual payments. The bonds mature in four years. The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?
a. $24,113,418
b. $24,667,230
c. $25,000,000
d. $25,891,632
Q:
When financial institutions expect interest rates to ____, they may ____.
a. increase; sell bonds and buy short-term securities
b. increase; sell short-term securities and buy bonds
c. decrease; sell bonds and buy short-term securities
d. increase; sell short-term securities and buy bonds AND decrease; sell bonds and buy short-term securities
Q:
The prices of bonds with ____ are most sensitive to interest rate movements.
a. high coupon payments
b. zero coupon payments
c. small coupon payments
d. None of these are correct because the size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements.
Q:
If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ pressure on bond prices and ____ pressure on yields to be earned by investors that purchase bonds and plan to hold them to maturity.
a. downward; downward
b. downward; upward
c. upward; upward
d. upward; downward
Q:
If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
Q:
The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is
a. -0.36.
b. -0.44.
c. -0.55.
d. -0.67.
e. 0.67.
Q:
Which of the following is NOT a factor affecting the market price of a foreign bond held by a U.S. investor?
a. foreign interest rate movements
b. credit risk
c. exchange rate fluctuations
d. All of these are factors affecting the market price of a foreign bond.
Q:
If the coupon rate equals the required rate of return, the price of the bond
a. should be above its par value.
b. should be below its par value.
c. should be equal to its par value.
d. is negligible.
Q:
A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?
a. 13 percent
b. 12 percent
c. 11 percent
d. 10 percent
Q:
The process by which higher credit risk in one country is transmitted to another country is known as
a. credit epidemic.
b. credit expansion.
c. credit contagion.
d. None of these are correct.
Q:
If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect
a. higher interest rates in the future, and they will buy bonds now.
b. higher interest rates in the future, and they will sell bonds now.
c. stable interest rates in the future, and they will buy bonds now.
d. lower interest rates in the future, and they will buy bonds now.
e. lower interest rates in the future, and they will sell bonds now.
Q:
The bonds that are most sensitive to interest rate movements have
a. no coupon and a short-term maturity.
b. high coupons and a short-term maturity.
c. high coupons and a long-term maturity.
d. no coupon and a long-term maturity.
Q:
If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
a. increase; upward; downward
b. decrease; upward; downward
c. decrease; upward; upward
d. increase; downward; upward
e. increase; upward; upward
Q:
Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?
a. 10 percent
b. 8.82 percent
c. 4.32 percent
d. 13.86 percent
e. None of these are correct.
Q:
A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for
a. $1,000.00.
b. $1,081.11.
c. $798.70.
d. $880.22.
e. None of these are correct.
Q:
The ____________ was established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.
a. Financial Risk Assessment Commission
b. Financial Markets Protection Agency
c. Financial Stability Oversight Council
d. Federal Bureau of Financial Markets
Q:
To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?
a. The annualized coupon should be split in half.
b. The annual discount rate should be divided by 2.
c. The number of annual periods should be doubled.
d. The par value should be split in half.
e. All of these adjustments have to be made.
Q:
The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.
a. slightly; rises
b. very; rises
c. very; declines
d. slightly; declines
Q:
A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
a. increase; upward
b. increase; downward
c. decrease; downward
d. None of these are correct.
Q:
Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
a. $9.33 million
b. $11.00 million
c. $10.64 million
d. $9.82 million
e. None of these are correct.
Q:
With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.
a. matching
b. laddered
c. barbell
d. interest rate
e. None of these are correct.
Q:
Which of the following are common methods of assessing the sensitivity of bonds to a change in the required rate of return on bonds?
a. duration and convexity
b. bond yield elasticity and durability
c. bond price elasticity and return sensitivity analysis
d. bond price elasticity and duration
Q:
Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?
a. $1,000.00
b. $951.97
c. $856.80
d. None of these are correct.
Q:
If interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's credit risk.)
a. consistently increase
b. consistently decrease
c. remain unchanged
d. change in a direction that cannot be determined with the above information
Q:
Assume that the price of a $1,000 zero-coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?
a. -.980
b. +.980
c. -.494
d. +.494
e. None of these are correct.
Q:
Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?
a. $1,063.40
b. $1,000
c. $939.25
d. None of these are correct.
Q:
If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
Q:
If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.
a. high-coupon bonds; more favorably affected by declining interest rates
b. zero- or low-coupon bonds; more favorably affected by declining interest rates
c. zero- or low-coupon bonds; more favorably affected by rising interest rates
d. high-coupon bonds; completely insulated from rising interest rates
Q:
For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the
a. greater is the premium on the price.
b. greater is the discount on the price.
c. smaller is the premium on the price.
d. smaller is the discount on the price.
Q:
The appropriate discount rate for valuing any bond is the
a. bond's coupon rate.
b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.
c. Treasury bill rate with an adjustment to include a risk premium if one exists.
d. yield that could be earned on alternative investments with similar risk and maturity.
Q:
Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)
a. reduced Treasury borrowing along with anticipation that money supply growth will decrease
b. reduced Treasury borrowing along with anticipation that money supply growth will increase
c. an anticipated drop in money supply growth along with increasing Treasury borrowing
d. higher levels of Treasury borrowing and corporate borrowing
Q:
From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.
a. high yield; appreciates
b. high yield; remains stable
c. low yield; appreciates
d. low yield; depreciates
Q:
Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is
a. 0.77.
b. -0.77.
c. -0.90.
d. -1.06.
e. None of these are correct.
Q:
Assume a bond with a $1,000 par value and a 7 percent coupon rate, three years remaining to maturity, and a 9 percent yield to maturity. The duration of this bond is ____ years.
a. 1.92
b. 2.5
c. 2.8
d. None of these are correct.
Q:
A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?
a. $1,069.31
b. $1,000.00
c. $971.20
d. $927.66
e. None of these are correct.
Q:
Leveraged buyouts are commonly financed by the issuance of
a. money market securities.
b. Treasury bonds.
c. corporate bonds.
d. municipal bonds.
Q:
A(n) __________ allows investors to exchange a bond for a stated number of shares of the firms _________.
a. equity-for-debt swap; common stock
b. debt-for-equity swap; preferred stock
c. call provision; common stock
d. convertible bond; common stock
Q:
Jim purchases $10,000 par value bonds with a 10 percent coupon rate and a 7 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a. 8
b. 7
c. 10
d. More information is needed to answer this question.
Q:
The issuance of municipal securities is regulated by
a. the Securities and Exchange Commission.
b. the Consumer Financial Protection Bureau.
c. the respective state governments.
d. the Federal Reserve.
Q:
____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.
a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
Q:
Which of the following statements is NOT true regarding STRIPS?
a. They are not issued by the Treasury.
b. They are created and sold by various financial institutions.
c. They are backed by the U.S. government.
d. They have to be held until maturity.
e. All of these are true regarding STRIPS.
Q:
Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a. 12
b. 9
c. 10.5
d. More information is needed to answer this question
Q:
A call provision on bonds normally allows the firm to
a. sell new bonds at par value.
b. sell new bonds above market value.
c. sell bonds to the Treasury.
d. buy back bonds that it previously issued.
Q:
Which of the following statements is incorrect?
a. A municipal bond must pay a risk premium to compensate for the possibility of default risk.
b. A Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
c. The income earned from municipal bonds is exempt from federal taxes.
d. All of these are correct.
Q:
Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.
a. higher; lower
b. lower; lower
c. higher; higher
d. None of these are correct.
Q:
If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.
a. decline; more
b. decline; less
c. increase; more
d. None of these are correct.
Q:
A corporate restructuring in which the corporation seeks to reduce its debt by issuing stock and using the proceeds to retire its existing bonds is known as a(n)
a. debt-for-equity swap.
b. leveraged buyout.
c. equity-for-debt swap.
d. collateralized debt retirement.
Q:
Interest earned from Treasury bonds is
a. exempt from all income tax.
b. exempt from federal income tax.
c. exempt from state and local taxes.
d. subject to all income taxes.
Q:
A 10-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.
a. 250
b. 255
c. 500
d. 510
Q:
Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a. annual
b. semiannual
c. quarterly
d. monthly
Q:
If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.
a. more; less; lower
b. more; less; higher
c. less; more; higher
d. None of these are correct.
Q:
The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.
a. Federal Ratings Bureau
b. Office of Credit Ratings
c. Office of Agency Supervision
d. Ratings Oversight Commission
Q:
Erin, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.
a. 9.96
b. 10.00
c. 10.33
d. 10.24
e. None of these are correct.
Q:
____ commonly have maturities of 10 years or longer.
a. Commercial paper certificates
b. Treasury bills
c. Federal fund notes
d. Bonds
Q:
The coupon rate of most variable-rate bonds is tied to
a. the prime rate.
b. the discount rate.
c. LIBOR.
d. the federal funds rate.
Q:
Which of the following is NOT likely to be an example of a protective covenant provision?
a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers' salaries a firm can pay
c. a limit on the amount of additional debt a firm can issue
d. a call feature
Q:
Note maturities are usually ____, while bond maturities are ____.
a. less than 10 years; 10 years or more
b. 10 years or more; less than 10 years
c. less than 5 years; 5 years or more
d. 5 years or more; less than 5 years
Q:
Which of the following is NOT an advantage of online bond brokerage services?
a. Pricing is more transparent because investors can easily compare bid and ask spreads.
b. Some services charge commissions, which may be more easily understood than bid and ask spreads.
c. Some brokers have narrowed their spreads so that they do not lose business to competitors.
d. All of these are advantages of online bond brokerage services.
Q:
Everything else being equal, which of the following bond ratings is associated with the highest yield?
a. Baa
b. A
c. Aa
d. Aaa
Q:
Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities.
a. collateralized debt obligations (CDOs)
b. credit default swaps
c. reverse loans
d. inverted bonds
Q:
When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.
a. auction-rate securities
b. structured notes
c. leveraged notes
d. stripped securities