Q&A Hero

Q: An inverted yield curve implies that A. long-term interest rates are lower than short-term interest rates. B. long-term interest rates are higher than short-term interest rates. C. long-term interest rates are the same as short-term interest rates. D. intermediate-term interest rates are higher than either short- or long-term interest rates. E. None of the options are correct.

Q: CDOs are divided in tranches A. that provide investors with securities with varying degrees of credit risk. B. and each tranch is given a different level of seniority in terms of its claims on the underlying pool. C. and none of the tranches is risky. D. and equity tranch is very low risk. E. that provide investors with securities with varying degrees of credit risk, and each tranch is given a different level of seniority in terms of its claims on the underlying pool.

Q: Mortgage-backed CDOs were a disaster in 2007 because A. they were formed by pooling high quality fixed-rate loans with low interest rates. B. they were formed by pooling subprime mortgages. C. home prices stalled. D. the mortgages were variable rate loans, and interest rates increased. E. they were formed by pooling subprime mortgages, home prices stalled, the mortgages were variable rate loans, and interest rates increased.

Q: SIVs raise funds by ______ and then use the proceeds to ______. A. issuing short-term commercial paper; retire other forms of their debt B. issuing short-term commercial paper; buy other forms of debt such as mortgages C. issuing long-term bonds; retire other forms of their debt D. issuing long-term bonds; buy other forms of debt such as mortgages

Q: SIVs are A. structured investment vehicles. B. structured interest rate vehicles. C. semi-annual investment vehicles. D. riskless investments. E. structured insured variable rate instruments. SIVs are structured investment vehicles.

Q: The compensation from a CDS can come from A. the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's par value. B. the CDS issuer paying the swap holder the difference between the par value of the bond and the bond's market price. C. the federal government paying off on the insurance claim. D. the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's par value, and the CDS issuer paying the swap holder the difference between the par value of the bond and the bond's market price. E. None of the options are correct.

Q: A credit default swap is A. a fancy term for a low-risk bond. B. an insurance policy on the default risk of a federal government bond or loan. C. an insurance policy on the default risk of a corporate bond or loan. D. an insurance policy on the default risk of federal government and corporate bonds and loans. E. None of the options are correct.

Q: A CDS is a A. command duty supervisor. B. collateralized debt security. C. commercial debt servicer. D. collateralized debenture security. E. credit default swap.

Q: A CDO is a A. command duty officer. B. collateralized debt obligation. C. commercial debt originator. D. collateralized debenture originator. E. common debt officer.

Q: One year ago, you purchased a newly-issued TIPS bond that has a 4% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.6%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond? A. $40.00, $1,000 B. $41.44, $1,036 C. $40.00, $1,036 D. $36.00, $1,040 E. $76.00, $1,000

Q: One year ago, you purchased a newly-issued TIPS bond that has a 5% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond? A. $50.00, $1,000 B. $32.00, $1,032 C. $50.00, $1,032 D. $32.00, $1,050 E. $51.60, $1,032

Q: A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest 112 days ago, the invoice price of the bond would be A. $1,027.69. B. $1,027.35. C. $1,026.77. D. $1,027.98. E. $1,028.15.

Q: A 7.5% coupon bond with an ask price of $100.00 pays interest every 182 days. If the bond paid interest 62 days ago, the invoice price of the bond would be A. $1,011.67. B. $1,012.35. C. $1,012.77. D. $1,011.98. E. $1,012.15.

Q: A 7% coupon bond with an ask price of $100.00 pays interest every 182 days. If the bond paid interest 32 days ago, the invoice price of the bond would be A. $1,005.67. B. $1,007.35. C. $1,006.35. D. $1,006.15. E. $1,007.12.

Q: If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago, the accrued interest would be A. $27.69. B. $27.35. C. $26.77. D. $27.98. E. $28.15.

Q: If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago, the accrued interest would be A. $11.67. B. $12.35. C. $12.77. D. $11.98. E. $12.15.

Q: If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the accrued interest would be A. $5.67. B. $7.35. C. $6.35. D. $6.15. E. $7.12.

Q: A convertible bond has a par value of $1,000 and a current market value of $1,150. The current price of the issuing firm's stock is $65, and the conversion ratio is 15 shares. The bond's conversion premium is A. $40. B. $150. C. $175. D. $200.

Q: A convertible bond has a par value of $1,000 and a current market value of $950. The current price of the issuing firm's stock is $22, and the conversion ratio is 40 shares. The bond's conversion premium is A. $40. B. $70. C. $190. D. $200.

Q: A convertible bond has a par value of $1,000 and a current market price of $1,105. The current price of the issuing firm's stock is $20, and the conversion ratio is 35 shares. The bond's market conversion value is A. $700. B. $810. C. $870. D. $1,000.

Q: A convertible bond has a par value of $1,000 and a current market price of $975. The current price of the issuing firm's stock is $42, and the conversion ratio is 22 shares. The bond's market conversion value is A. $729. B. $924. C. $870. D. $1,000.

Q: You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell. A. 10.00% B. 23.8% C. 13.8% D. 1.4%

Q: You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell. A. 10.00% B. 20.42% C. -1.4% D. 1.4%

Q: A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of _______ today. A. $59.74 B. $501.87 C. $513.16 D. $483.49

Q: A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the bond matures in 18 years, the bond should sell for a price of _______ today. A. $422.41 B. $501.87 C. $513.16 D. $130.04

Q: Consider two bonds, F and G. Both bonds presently are selling at their par value of $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. If the yields to maturity on the two bonds change from 9% to 10%, A. both bonds will increase in value, but bond F will increase more than bond G. B. both bonds will increase in value, but bond G will increase more than bond F. C. both bonds will decrease in value, but bond F will decrease more than bond G. D. both bonds will decrease in value, but bond G will decrease more than bond F. E. None of the options are correct.

Q: You purchased an annual interest coupon bond one year ago that had nine years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been A. 8.00%. B. 7.82%. C. 7.00%. D. 11.95%. E. None of the options are correct.

Q: You purchased an annual interest coupon bond one year ago that now has 18 years remaining until maturity. The coupon rate of interest was 11%, and par value was $1,000. At the time you purchased the bond, the yield to maturity was 10%. The amount you paid for this bond one year ago was A. $1,057.50. B. $1,075.50. C. $1,083.65. D. $1.092.46. E. $1,104.13.

Q: A coupon bond that pays interest of $40 semi-annually has a par value of $1,000, matures in four years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is A. 8.69%. B. 9.09%. C. 10.43%. D. 9.76%. E. None of the options are correct.

Q: A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is A. 9.00%. B. 10.15%. C. 11.25%. D. 12.32%. E. None of the options are correct.

Q: A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%. A. $922.78 B. $894.51 C. $1,075.80 D. $1,077.20 E. None of the options are correct.

Q: A coupon bond that pays interest semi-annually has a par value of $1,000, matures in six years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be __________ if the coupon rate is 9%. A. $922.78 B. $924.16 C. $1,075.80 D. $1,000.00 E. None of the options are correct.

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%. A. $833.96 B. $620.92 C. $1,123.01 D. $886.28 E. $1,000.00

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in six years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%. A. $712.99 B. $851.93 C. $1,123.01 D. $886.28 E. $1,000.00

Q: Which of the following is not a type of international bond? A. Samurai bonds B. Yankee bonds C. Bulldog bonds D. Elton bonds E. All of the options are international bonds.

Q: Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year, you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond? A. 6.43% B. 7.96% C. 8.23% D. 8.97% E. 9.13%

Q: What is the relationship between the price of a straight bond and the price of a callable bond? A. The straight bond's price will be higher than the callable bond's price for low interest rates. B. The straight bond's price will be lower than the callable bond's price for low interest rates. C. The straight bond's price will change as interest rates change, but the callable bond's price will stay the same. D. The straight bond and the callable bond will have the same price. E. There is no consistent relationship between the two types of bonds.

Q: Bond analysts might be more interested in a bond's yield to call if A. the bond's yield to maturity is insufficient. B. the firm has called some of its bonds in the past. C. the investor only plans to hold the bond until its first call date. D. interest rates are expected to rise. E. interest rates are expected to fall.

Q: One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond? A. $60.00, $1,000 B. $42.00, $1,042 C. $60.00, $1,042 D. $62.52, $1,042 E. $102.00, $1,000

Q: Swingin'Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is known as A. a contingency bond. B. a catastrophe bond. C. an emergency bond. D. an incident bond. E. an eventuality bond.

Q: A zero-coupon bond is one that A. effectively has a zero-percent coupon rate. B. pays interest to the investor based on the general level of interest rates rather than at a specified coupon rate. C. pays interest to the investor without requiring the actual coupon to be mailed to the corporation. D. is issued by state governments because they don't have to pay interest. E. is analyzed primarily by focusing ("zeroing in") on the coupon rate.

Q: Debt securities are often called fixed-income securities because A. the government fixes the maximum rate that can be paid on bonds. B. they are held predominantly by older people who are living on fixed incomes. C. they pay a fixed amount at maturity. D. they promise either a fixed stream of income or a stream of income determined by a specific formula. E. they were the first type of investment offered to the public which allowed them to "fix" their income at a higher level by investing in bonds.

Q: Collateralized bonds A. rely on the general earning power of the firm for the bond's safety. B. are backed by specific assets of the issuing firm. C. are considered the safest variety of bonds. D. are backed by specific assets of the issuing firm and are generally considered the safest variety of bonds. E. All of the options are true.

Q: Subordination clauses in bond indentures A. may restrict the amount of additional borrowing the firm can undertake. B. are always bad for investors. C. provide higher priority to senior creditors in the event of bankruptcy. D. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy. E. All of the options are true.

Q: When a bond indenture includes a sinking fund provision, A. firms must establish a cash fund for future bond redemption. B. bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. D. firms must establish a cash fund for future bond redemption, and bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed. E. None of the options are true.

Q: Altmans Z scores are assigned based on a firm's financial characteristics and are used to predict A. required coupon rates for new bond issues. B. bankruptcy risk. C. the likelihood of a firm becoming a takeover target. D. the probability of a bond issue being called. E. None of the options are correct.

Q: TIPS are A. securities formed from the coupon payments only of government bonds. B. securities formed from the principal payments only of government bonds. C. government bonds with par value linked to the general level of prices. D. government bonds with coupon rates linked to the general level of prices. E. zero-coupon government bonds.

Q: Convertible bonds A. give their holders the ability to share in price appreciation of the underlying stock. B. offer lower coupon rates than similar nonconvertible bonds. C. offer higher coupon rates than similar nonconvertible bonds. D. give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds. E. give their holders the ability to share in price appreciation of the underlying stock and offer higher coupon rates than similar nonconvertible bonds.

Q: The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A. deferral. B. reissue. C. repurchase. D. refunding. E. None of the options are correct.

Q: Most corporate bonds are traded A. on a formal exchange operated by the New York Stock Exchange. B. by the issuing corporation. C. over the counter by bond dealers linked by a computer quotation system. D. on a formal exchange operated by the American Stock Exchange. E. on a formal exchange operated by the Philadelphia Stock Exchange.

Q: The bond indenture includes A. the coupon rate of the bond. B. the par value of the bond. C. the maturity date of the bond. D. All of the options are correct. E. None of the options are correct.

Q: Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is A. zero. B. $14.87. C. $45.85. D. $7.44. E. None of the options are correct.

Q: Which one of the following statements about convertibles are false? I) The longer the call protection on a convertible, the less the security is worth. II) The more volatile the underlying stock, the greater the value of the conversion feature. III) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. IV) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. A. I only B. II only C. I and III D. IV only E. I, III, and IV

Q: Which one of the following statements about convertibles is true? A. The longer the call protection on a convertible, the less the security is worth. B. The more volatile the underlying stock, the greater the value of the conversion feature. C. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. D. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. E. Convertibles are not callable.

Q: The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with a value at maturity of $1,000 is A. 5.1%. B. 8.8%. C. 10.8%. D. 13.4%. E. None of the options are correct.

Q: Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately A. $308. B. $315. C. $464. D. $555. E. None of the options are correct.

Q: A bond with a 12% coupon, 10 years to maturity, and selling at $88.00 has a yield to maturity of A. over 14%. B. between 13% and 14%. C. between 12% and 13%. D. between 10% and 12%. E. less than 12%.

Q: A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity of 12%. Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be A. 10.00%. B. 10.9%. C. 12.0%. D. 12.4%. E. None of the options are correct.

Q: Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now, the price of this bond will be A. higher. B. lower. C. the same. D. $1,000. E. Cannot be determined.

Q: A bond will sell at a discount when A. the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity. B. the coupon rate is greater than yield to maturity. C. the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity. D. the coupon rate is less than the current yield, and the current yield is less than yield to maturity. E. None of the options are true.

Q: The yield to maturity on a bond is A. below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium. B. the discount rate that will set the present value of the payments equal to the bond price. C. based on the assumption that any payments received are reinvested at the coupon rate. D. None of the options are correct.

Q: The ________ is used to calculate the present value of a bond. A. nominal yield B. current yield C. yield to maturity D. yield to call E. None of the options are correct.

Q: You purchased an annual-interest coupon bond one year ago with six years remaining to maturity at the time of purchase. The coupon interest rate is 10%, and par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been A. 7.00%. B. 8.00%. C. 9.95%. D. 11.95%. E. None of the options are correct.

Q: A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975? A. 10.00% B. 6.68% C. 11.00% D. 8.68% E. None of the options are correct.

Q: A 12% coupon bond with semi-annual payments is callable in five years. The call price is $1,120. If the bond is selling today for $1,110, what is the yield to call? A. 12.03% B. 10.86% C. 10.95% D. 9.14% E. None of the options are correct.

Q: A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100. If the bond is selling today for $975, the yield to call is A. 10.26%. B. 10.00%. C. 9.25%. D. 13.98%. E. None of the options are correct.

Q: Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond D is A. 10%. B. 11%. C. 12%. D. 14%. E. None of the options are correct.

Q: Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond C is A. 10%. B. 11%. C. 12%. D. 14%. E. None of the options are correct.

Q: Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond B is A. 10%. B. 11%. C. 12%. D. 14%. E. None of the options are correct.

Q: Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond A is A. 10%. B. 11%. C. 12%. D. 14%. E. None of the options are correct. ($1,000 $909.09) $909.09 = 10%.

Q: A convertible bond has a par value of $1,000 and a current market value of $850. The current price of the issuing firm's stock is $27, and the conversion ratio is 30 shares. The bond's conversion premium is A. $40. B. $150. C. $190. D. $200. E. None of the options are correct.

Q: A convertible bond has a par value of $1,000 and a current market price of $850. The current price of the issuing firm's stock is $29, and the conversion ratio is 30 shares. The bond's market conversion value is A. $729. B. $810. C. $870. D. $1,000. E. None of the options are correct.

Q: A coupon bond pays interest semi-annually, matures in five years, has a par value of $1,000, a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. The price the bond should sell for today is A. $922.77. B. $924.16. C. $1,075.80. D. $1,077.20. E. None of the options are correct.

Q: A Treasury bill with a par value of $100,000 due three months from now is selling today for $97,087 with an effective annual yield of A. 12.40%. B. 12.55%. C. 12.62%. D. 12.68%. E. None of the options are correct.

Q: A Treasury bill with a par value of $100,000 due two months from now is selling today for $98,039 with an effective annual yield of A. 12.40%. B. 12.55%. C. 12.62%. D. 12.68%. E. None of the options are correct.

Q: A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010. The effective annual yield is A. 12.40%. B. 12.55%. C. 12.62%. D. 12.68%. E. None of the options are correct.

Q: You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell. A. 10.00% B. 20.42% C. 13.8% D. 1.4% E. None of the options are correct.

Q: A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, the bond should sell for a price of _______ today. A. $422.41 B. $501.87 C. $513.16 D. $483.49 E. None of the options are correct.

Q: Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in five years, while bond B will mature in six years. If the yields to maturity on the two bonds change from 12% to 10%, A. both bonds will increase in value, but bond A will increase more than bond B. B. both bonds will increase in value, but bond B will increase more than bond A. C. both bonds will decrease in value, but bond A will decrease more than bond B. D. both bonds will decrease in value, but bond B will decrease more than bond A. E. None of the options are correct.

Q: You purchased an annual interest coupon bond one year ago that had six years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been A. 7.00%. B. 7.82%. C. 8.00%. D. 11.95%. E. None of the options are correct.