9.4 Types of Bonds
1) Eurobonds are
A) issued in a country diferent from the one in whose currency the bond is denominated.
B) issued only in Europe.
C) the European equivalent of a junk bond.
D) none of the above.
Question Status: Previous edition
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk-Return Tradeof
2) Which of the following statements about zero coupon bonds is FALSE?
A) When the bonds mature, the issuing irm is faced with a small cash outlow relative to
the cash inlow the irm receives when the bonds are initially issued.
B) Zero coupon bonds have lower interest rate risk than bonds with high coupons.
C) Zero coupon bonds are an extremely popular way for corporations to borrow money.
D) Most zero coupon bonds in the U.S. are government issues.
Question Status: Revised
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
3) Which of the following bond types has the greatest risk for investors?
A) Debentures
B) Mortgage bonds
C) Floating rate bonds
D) Subordinated debentures
Question Status: New question
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
29
4) The holder of a non-amortizing bonds
A) receives no periodic interest payments.
B) receives the full par value of the bond when it matures.
C) receives shares of common stock rather than cash interest payments.
D) receives periodic payments that consist of both interest and principal.
Question Status: New question
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
5) Junk bonds
A) pay little or no interest.
B) are commonly used to inance municipal waste disposal facilities.
C) are issued by the U. S. Treasury Department.
D) have yields that are considerably higher than those of the highest rated bonds.
Question Status: New question
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
6) Debentures are unsecured long-term debt.
Question Status: Previous edition
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
7) Zero coupon bonds are disadvantageous to the issuing irm if interest rates fall.
Question Status: Previous edition
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
30
8) Eurobonds are bonds issued in a country diferent from the one in whose currency the
bond is denominated.
Question Status: Previous edition
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
9) Convertible bonds can be exchanged for the issuing irm’s common stock at a price
speciied at the time of issue.
Question Status: Previous edition
Objective: 9.4 Identify the major types of corporate bonds.
Keywords: bond features
Principles: Principle 2: There Is a Risk–Return Tradeof
9.5 Determinants of Interest
1) The nominal interest rate
A) does not include inlation.
B) includes inlation and the real rate of interest.
C) ignores the Fisher efect.
D) is the rate at which banks lend money to other banks.
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
2) Government bonds have lower yield to maturity than do corporate bonds of the same
maturity because the ________ premium is lower for government bonds.
A) interest rate risk
B) inlation
C) default
D) maturity
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
31
3) The Fisher efect can be expressed mathematically as
A) ( nominal rate)= (the real rate of interest) ( the inlation rate).
B) (1+ the nominal rate)= (1+the real rate of interest) (1 + the inlation rate).
C) the nominal rate)= the real rate of interest + the inlation rate).
D) the real rate of interest= the nominal rate – the inlation rate).
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
4) The yield on a corporate bond with a 20 year maturity would include
A) only the real rate of interest and expected inlation.
B) the risk-free rate multiplied by 1+ default rate.
C) the risk-free rate plus a default risk premium, a liquidity risk premium and a maturity
risk premium.
D) the real rate of interest, the expected inlation rate and a default risk premium.
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
5) Pursuant to the Fisher Efect, the real interest rate is exactly equal to the nominal
interest rate less the rate of inlation.
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
6) When inlation rates go up, bond prices go up as well.
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
32
7) As the time to maturity increases, the maturity premium increases.
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
8) Maturity risk and liquidity risk are equivalent terms.
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
9) Maturity risk and liquidity risk are equivalent terms.
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
10) Long-term government bonds are not without maturity risk.
Question Status: New question
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
11) Explain why an increase in the inlation rate will cause the yield to maturity on a bond
to increase.
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
33
12) What elements determine what the yield to maturity will be for a bond?
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
13) Given the anticipated rate of inlation (i) of 6.3% and the real rate of interest (R) of
4.7%, ind the nominal rate of interest (r).
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
14) If provided the nominal rate of interest (r) of 14.2% and the anticipated rate of inlation
(i) of 5.5%, what is the real rate of interest (R)?
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
34
15) Given the anticipated rate of inlation (i) of 6.13% and the real rate of interest (R) of
7.56%, what is the true inlation premium?
Question Status: Previous edition
Objective: 9.5 Explain the efects of inlation on interest rates and describe the term structure of
interest rates.
Keywords: interest rates
Principles: Principle 1: Money Has a Time Value
35