Q&A Hero

Investments & Securities

Q: fluctuations in yields is one means by which the economy allocates scarce credit.
Q: the prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds.
Q: if interest rates have fallen, a firm may prefer to repurchase the bonds on the market instead of calling and redeeming them.
Q: a bond is more likely to be called after interest rates have fallen.
Q: a call penalty is a payment made to the firm to encourage early retirement of the bond.
Q: bonds that are callable often have a call penalty.
Q: a call feature will have no impact on the value of a bond if interest rates rise.
Q: an investor may expect a bond to be called if its current yield exceeds the yield to maturity.
Q: if interest rates increase, a bond may be called.
Q: if a $1,000 bond with a 7 percent coupon were to sell for $978, the current interest rate exceeds 7 percent.
Q: if a bond sells for a discount, the yield to maturity exceeds the current yield.
Q: if a bond sells for a premium, the current yield exceeds the yield to maturity.
Q: if bond prices rise, the yield to maturity declines.
Q: if bond prices were to decline, the current yield would increase.
Q: if a $1,000 bond has a coupon of 8 percent and matures after eight years, the price of the bond will exceed $1,000 if the current interest rate is 9 percent.
Q: if investors expect interest rates to decline, they should buy bonds.
Q: the current yield exceeds the yield to maturity if interest rates fall.
Q: most bonds pay interest semi-annually.
Q: as interest rates increase, the prices of existing bonds increase.
Q: the value of a bond depends on the amount of principal, when it matures, and the interest it pays.
Q: a few bonds called "perpetuals" never mature.
Q: a $1,000 zero coupon bond matures in five years and sells for $784 to yield 5 percent. the accrued interest for the first year is $39. you are in the 30 percent federal income tax bracket. what is tax owed in the interest if the bond is (a) in your regular personal account or (b) in your roth retirement account (ira)?
Q: you own a $10,000 bond that pays interest of 5.6 percent annually. if you are in the 30 percent federal income tax bracket, what is the annual tax owed if the bond is (a) in your regular personal account or (b) in your traditional retirement account (ira)?
Q: a bond matures in 2020 and has an annual coupon of 3.65 percent, payable on january 1 and july the current price of the $1,000 bond is $978. on february 1, you purchase $10,000 face amount, and your broker charges a $25 commission. how much must you remit for the purchase?
Q: the accrued interest on a bond a. avoids personal income taxation b. is paid by the buyer of the bond to the seller of the bond c. is the result of the possibility of the bond defaulting d. applies only to zero coupon bonds
Q: a call penalty (i.e., call premium) protects the a. investor against premature retirement of the bond b. investor from default c. issuer from rising interest rates d. issuer from the bondholder requesting payment
Q: zero coupon bonds a. are sold at a discount b. are sold for a premium c. accrue interest at maturity d. cannot be called
Q: bonds may be retired by 1> being called 2> a sinking fund 3> being repurchased a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q: serial bonds a. have a sinking fund b. are issued and retired in a series c. are a type of income bond d. are primarily issued by the federal government
Q: zero coupon and split coupon bonds a. experience stable prices b. conserve the firm's cash c. reduce the firm's use of financial leverage d. pay interest only at maturity
Q: a split coupon bond a. distributes interest in cash and additional debt b. combines features of zero coupon bonds and secured bonds c. has a period of no coupon and a period with a high coupon d. conserves the investor's cash
Q: a fallen angel is a. a quality bond whose credit rating has declined b. a firm in financial difficulty c. a junk bond in default d. a firm being liquidated
Q: a high yield bond a. pays no interest b. pays interest only at maturity c. is a highrisk debt instrument d. is a bond in default
Q: variable interest rate bonds a. do not mature b. are an example of a discount bond c. have fluctuating coupons d. are nonmarketable securities
Q: in general, income bonds are less risky than a. mortgage bonds b. secured debt c. preferred stock d. shortterm debt obligations
Q: equipment trust certificates are a. riskier than convertible bonds b. secured debt obligations c. a type of debenture d. bonds with low credit ratings
Q: when an investor purchases a bond, he or she a. pays accrued interest b. receives accrued interest c. pays accrued dividends d. receives accrued dividends
Q: risk to bondholders comes from 1> possibility of default 2> higher interest rates 3> higher inflation a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q: in a typical bond classification a. "a" are investment grade bonds b. "b" stands for a "bearer" bond c. "c" stands for a convertible bond d. "d" represents a debenture
Q: a negatively sloped yield curve suggests 1> shortterm rates exceed longterm rates 2> longterm rates exceed shortterm rates 3> the federal reserve is following a tight monetary policy 4> the federal reserve is following an easy monetary policy a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q: as the length of time to maturity (i.e., the term) of a bond increases, generally a. the coupon rate rises b. the coupon rate falls c. the riskiness of the bond falls d. the price of the bond rises
Q: virtually all bonds have each of the following except a. interest payments b. maturity date c. voting rights d. an indenture
Q: if a bond has a call feature, it usually also has a call penalty, which must be paid to the bondholder in partial compensation for the early retirement of the bond.
Q: a firm will exercise its option to call a bond if interest rates rise.
Q: a call feature is an option while a sinking fund requires a mandatory payment by the firm.
Q: a call penalty protects the firm from early retirement of the bond.
Q: if a firm repurchases bonds at a discount, the difference between the principal amount and the purchase price produces taxable income.
Q: a firm may not repurchase bonds at a discount.
Q: a bond with a balloon payment cannot not have a sinking fund.
Q: a strong sinking fund makes the bond riskier because it is harder for the firm to retire the debt.
Q: calculation of the returns earned on a highyield security should include the sale price of bond as well as interest received.
Q: a diversified portfolio of highyield securities may be achieved with ten or fewer bonds.
Q: one advantage to the issuing firm of a split coupon bond is that cash is initially conserved.
Q: the term of an extendible bond is known with certainty.
Q: split coupon bonds offer investors special tax advantages.
Q: a split coupon bond combines a zero coupon bond with a regular coupon bond.
Q: an investor concerned with safety of principal may purchase preferred stock instead of bonds issued by the same company.
Q: interest accrues on a zero coupon bond but not on a term bond.
Q: euro-bonds are denominated in dollars.
Q: a "fallen angel" was once a quality bond whose issuing firm is currently having financial problems.
Q: interest on a convertible bond may be exchanged for stock instead of cash.
Q: if a firm repurchases debt at a discount, its net income is increased.
Q: if an american investor buys a eurobond and the value of the dollar rises, that individual earns a larger return on the investment.
Q: a eurobond is denominated in the currency of a european nation.
Q: income taxation on the interest earned from an investment in a zero coupon bond occurs when the bond matures.
Q: a zero coupon only pays interest when it is sold.
Q: the coupon on the variable interest rate bond varies with changes in interest rates.
Q: a negatively sloped yield curve occurs when short-term rates exceed longterm rates.
Q: the structure of yields generally suggests that longterm bonds have greater yields.
Q: debentures are secured by equipment.
Q: mortgage bonds are secured by property.
Q: a bond that is traded "flat" has a fixed coupon.
Q: a bond's seller pays accrued interest to the buyer.
Q: in most cases, interest accrues daily on longterm bonds but distributed only twice a year.
Q: since bonds are legal obligations, their prices are determined when issued and do not change.
Q: bonds with comparable ratings but different terms to maturity tend to have different yields.
Q: federal government bonds are among the least risky bonds because the federal government has the power to tax and print money.
Q: one source of risk associated with investments in bonds is the possibility of default.
Q: under current law, american corporations may not issue bearer bonds with coupons attached.
Q: when an investor purchases a bond, that individual receives accrued interest from the seller.
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