Q&A Hero

Q: if interest rates increase, 1> the price of a ginnie mae falls 2> the price of a ginnie mae rises 3> the speed with which ginnie maes are retired increases 4> the speed with which ginnie maes are retired declines a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: ginnie maes are a. long-term bonds issued by the federal government b. short-term, mortgage-backed securities c. mortgage backed securities issued by the government national mortgage association d. long-term mortgage securities sold by banks

Q: sources of risk to investors who purchase federal government bonds include 1> reinvestment rate risk 2> risk of inflation 3> interest rate risk a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: treasury bills a. sell at a discount b. sell for a premium c. pay an established 4.5% annual interest d. mature after one year

Q: which of the following is not traded in the secondary markets? a. u.s. treasury bills b. u.s. treasury bonds c. series ee bonds d. municipal bonds

Q: the interest on series ee bonds a. is exempt from federal income taxation b. is distributed semi-annually c. is exempt from state income taxation d. is taxed even though it is not received until the bond is redeemed

Q: which of the following types of securities is not issued by the federal government? a. money market securities b. longterm bonds c. stock d. zero coupon bonds

Q: build american bonds are not exempt from federal income taxation.

Q: municipal bonds are exempt from federal income but not necessarily from state income taxation.

Q: yields on municipal bonds exceed yields on corporate bonds with the same term to maturity and credit rating.

Q: the price of a municipal bond will tend to rise when interest rates decline.

Q: some municipalities have their municipal bonds insured in order to facilitate marketing (issue) them.

Q: municipal bonds are considered to be safe investments because they may be readily sold with little chance of loss.

Q: municipal bonds are not registered with the sec.

Q: a revenue bond is supported by the taxation authority of the issuing government.

Q: municipal bonds are more marketable than corporate and federal government bonds.

Q: poor quality municipal bonds pay more interest than poor quality corporate debt.

Q: municipal bonds are often examples of serial bonds.

Q: if an investor is in the 25 percent income tax bracket and can earn 5 percent on a corporate bond, then 3 percent on a municipal bond is attractive.

Q: collateralized mortgage obligations (cmos) are sold in classes ("tranches") that increase the certainty of the timing of payments.

Q: if interest rates decline, the expected life of a ginnie mae bond is reduced.

Q: since ginnie mae bonds are debt instruments, the timing and amount of each payment is known.

Q: if interest rates fall, the value of a ginnie mae bond should increase.

Q: the owner of a ginnie mae bond receives monthly both interest and principal repayments.

Q: ginnie mae bonds are secured by private mortgages.

Q: agencies of the federal government are not allowed to issue bonds.

Q: the prices of treasury bonds are insensitive to changes in interest rates.

Q: investors who acquire indexed bonds (tips) avoid the risk associated with inflation.

Q: if interest rates are expected to rise, a prudent strategy would be to sell treasury bills and buy treasury bonds.

Q: yields on all federal government securities are fixed and do not change with changes in interest rates.

Q: there is no secondary market for ee bonds.

Q: treasury bonds may be bought and sold in the secondary markets like corporate bonds.

Q: treasury bills are sold for a premium.

Q: treasury bills are longterm federal government securities sold at a discount.

Q: the federal government cannot issue debt that matures in less than five years.

Q: the interest earned on federal government's debt is exempt from state income taxation.

Q: interest earned on series ee bonds is exempt from federal income taxation.

Q: series ee bonds were designed to tap the funds of savers with modest sums to invest.

Q: the federal government only issues marketable securities such as treasury bills.

Q: federal government debt is believed to have minimal default risk because the government has the power to tax and to create money.

Q: an investor buys a $1,000, 20 year 7 percent (interest paid semiannually) bond at par. after five years have passed, interest rates are 10 percent. how much did the investor lose on the purchase of the bond?

Q: you purchase a high-yield, junk bond for $1,000 that pays $140 annually. after buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. you reinvest all the interest payments. how much will you have when the bond is retired after twelve years? what was the annual return you earned on this investment?

Q: junk corp.'s highyield bond has the following features: principal $1,000 coupon 10% maturity 5 years special features: company may extend the life of the bond to 10 years a. if interest rates are currently 12 percent on comparable high-yield securities and are not expected to change, what is the price of this bond? b. if interest rates are currently 9 percent on comparable highyield securities and are not expected to change, what is the price of this bond? c. if interest rates are currently 9 percent on comparable highyield securities but the investor has no forecast as to future rates, what is the possible range of prices for this bond?

Q: if you purchase a $5 preferred stock for $40 a share, what is the current yield? if you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?

Q: if a preferred stock pays an annual $4.50 dividend, what should be the price of the stock if comparable yields are 10 percent? what would be the loss if yields rose to 12 percent?

Q: compute the durations of the following bonds and rank them on the basis of their price volatility. assume that the current rate of interest is 8 percent. bond coupon term a 8 percent 10 years b 12 percent 10 years c 8 percent 5 years confirm your ranking by calculating the percentage change in the price of each bond when interest rates rise from 8 to 12 percent.

Q: a bond has the following terms: annual interest $100 term 15 years principal $1,000 a. what is the current price of the bond if comparable yields are 7 percent? b. what are the current yield and yield to maturity given the price of the bond in the previous question? c. if you expect the bond to be called at the end of the year, what would be the maximum price you should pay for the bond? d. is there a reason to expect that the bond will be called?

Q: a bond with a 5 percent coupon ($50 a year) that matures after eight years is selling for $779. what is the yield to maturity?

Q: a high-yield bond has the following terms: principal amount $1,000 annual interest paid $100 maturity 10 years a. what is the bond's price if comparable debt yields 12 percent? b. what would be the price if comparable debt yields 12 percent and the bond matures after five years? c. what are the current yields and yields to maturity in a and b? d. what would be the bond's price in a and b if interest rates declined to 9 percent? e. what are the current yield and yield to maturity in d? f. what two generalizations may be drawn from the above price changes?

Q: an individual may purchase preferred stock 1> in anticipation of lower interest rates 2> in anticipation of higher interest rates 3> to receive a flow of taxfree income 4> to receive a flow of income a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: if a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10 percent, the price of this preferred stock will be a. $100 b. $75 c. $50 d. $25

Q: if interest rates rise, the price of preferred stock a. rises b. falls c. is not affected d. rises or falls

Q: buying a bond with a duration equal to when the funds are needed a. reduces reinvestment rate risk b. increases impact of higher interest rates c. reduces the impact of default d. increases the bond's yield

Q: the concept of duration considers a. the timing of interest payments b. the timing of principal repayment c. the current rate of interest d. the timing of both interest and principal repayment

Q: while bond prices fluctuate, a. yields are constant b. coupons are constant c. the spread between yields is constant d. shortterm bond prices fluctuate more

Q: the yield to call a. is important if interest rates have fallen b. is important if interest rates have risen c. equals the yield to maturity d. equals the current yield

Q: a bond's call feature may be exercised if 1> the yield to maturity exceeds the current yield 2> the yield to maturity is less than the current yield 3> interest rates have risen 4> interest rates have fallen a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: if an investor were to anticipate that interest rates were going to fall, that individual should a. take no action b. buy bonds c. sell bonds d. acquire money market securities

Q: if interest rates in general were to fall, 1> the prices of existing bonds would rise 2> the prices of existing bonds would fall 3> yields to maturity would rise 4> yields to maturity would fall a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

Q: if a bond is selling for a premium, a. the yield to maturity exceeds the current yield b. the current yield exceeds the yield to maturity c. the current yield has risen d. the bond cannot be called

Q: the current yield on a longterm bond is the a. coupon interest divided by the price of the bond b. coupon c. interest paid, adjusted for price changes d. going rate of interest

Q: if a $1,000 bond costs $1,000 and pays $50 interest, 1> the current yield is 5 percent 2> the yield to maturity is 5 percent 3> the bond is selling for par a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: if a bond pays $90 interest annually, matures after ten years, and costs $1,100, the current yield is a. 8.2 percent b. 10.1 percent c. 9.0 percent d. 9.6 percent

Q: if a 7 percent, $1,000 bond matures after ten years and current interest rates are 9 percent, the current price of the bond should not be 1> $1,000 2> $872 3> $1,140 a. 1 and 2 b. 1 and 3 c. 2 and 3 d. only 2

Q: the value of a bond depends on 1> the coupon rate 2> the terms of the indenture 3> the maturity date a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

Q: if preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

Q: if investors expect interest rates to rise, they should sell preferred stock and buy bonds.

Q: the market price of preferred stock moves directly with changes in interest rates.

Q: from the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

Q: since preferred stock pays a fixed dividend, it is often valued as if it were a bond.

Q: if interest rates decline after a bond is issued and the investor reinvests the interest payment, the realized yield exceeds the yield to maturity.

Q: matching a bond's duration with the time the funds are needed reduces reinvestment risk.

Q: the smaller the duration, the more volatile the bond's price.

Q: the term and duration of a bond are equal for zero coupon bonds.

Q: a conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity.

Q: the smaller a bond's coupon implies a longer duration.

Q: the concept of duration stresses when a bond will make its payments to bondholders.

Q: the prices of zero coupon bonds fluctuate less than bonds with large coupons.

Q: the prices of twentyyear bonds tend to fluctuate less than bonds with five years to maturity.

Q: the spread (the basis points) between the yields on aaa-rated bonds and b-rated bonds tends to rise when yields increase.