978-0133427073 Test Bank Chapter 12 Part 2

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38) A requirement in the bond indenture that the firm pay off a portion of the bond issue each

year is called

A) a sinking fund.

B) a call provision.

C) a restrictive covenant.

D) a shelf registration.

39) (I) Callable bonds usually have a higher yield than comparable noncallable bonds.

(II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable

nonconvertible bonds.

A) (I) is true, (II) false.

B) (I) is false, (II) true.

C) Both are true.

D) Both are false.

40) Long-term unsecured bonds that are backed only by the general creditworthiness of the

issuer are called

A) junk bonds.

B) callable bonds.

C) convertible bonds.

D) debentures.

41) A secured bond is backed by

A) the general creditworthiness of the borrower.

B) an insurance company’s financial guarantee.

C) the expected future earnings of the borrower.

D) specific collateral.

42) Financial guarantees

A) are insurance policies to back bond issues.

B) are purchased by financially weaker security issuers.

C) lower the risk of the bonds covered by the guarantee.

D) do all of the above.

E) do only A and B of the above.

43) In its simplest form, a credit default swap provides

A) insurance against default in the principle and interest payments of a credit instrument.

B) an alternative method for bond issuers to pay principle and interest payments via a swap.

C) bond investors with a method to swap interest payments for principle payments during a

“credit event.”

D) the government with a guarantee that certain bond issues will not run into credit problems.

44) Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky

if they are ________ bonds.

A) secured; revenue

B) secured; general obligation

C) unsecured; revenue

D) unsecured; general obligation

45) Which of the following are true for the current yield?

A) The current yield is defined as the yearly coupon payment divided by the price of the security.

B) The formula for the current yield is identical to the formula describing the yield to maturity

for a discount bond.

C) The current yield is always a poor approximation for the yield to maturity.

D) All of the above are true.

E) Only A and B of the above are true.

46) The nearer a bond’s price is to its par value and the longer the maturity of the bond, the more

closely the ________ approximates the ________.

A) current yield; yield to maturity

B) current yield; coupon rate

C) yield to maturity; current yield

D) yield to maturity; coupon rate

47) Which of the following are true for the current yield?

A) The current yield is defined as the yearly coupon payment divided by the price of the security.

B) The current yield and the yield to maturity always move together.

C) The formula for the current yield is identical to the formula describing the yield to maturity

for a discount bond.

D) All of the above are true.

E) Only A and B of the above are true.

48) The current yield is a less accurate approximation of the yield to maturity the ________ the

time to maturity of the bond and the ________ the price is from/to the par value.

A) shorter; closer

B) shorter; farther

C) longer; closer

D) longer; farther

49) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is

A) 5%.

B) 10%.

C) 12%.

D) 15%.

50) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is

A) 5%.

B) 8%.

C) 10%.

D) 20%.

E) none of the above.

51) When an old bond’s market value is above its par value, the bond is selling at a ________.

This occurs because the old bond’s coupon rate is ________ the coupon rates of new bonds with

similar risk.

A) premium; below

B) premium; above

C) discount; below

D) discount; above

52) Corporations may enter the capital markets because

A) they do not have sufficient capital to fund their investment opportunities.

B) they want to preserve their capital to protect against expected needs.

C) it is required by the Securities and Exchange Commission (SEC).

D) none of the above.

53) Capital market trading occurs in

A) the primary market.

B) the secondary market.

C) both A and B of the above.

D) none of the above.

54) Bonds

A) are securities that represent a debt owed by the issuer to the investor.

B) obligate the issuer to pay a specified amount at a given date, generally without periodic

interest payments.

C) both A and B of the above.

D) none of the above.

55) STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called

A) interest-based securities.

B) zero-coupon securities.

C) leveraged securities.

D) covenant securities.

56) The risk on an agency bond is

A) high.

B) zero.

C) moderate.

D) low.

57) The first step in finding the value of a bond is to

A) discount back the cash flows using an interest rate that represents the yield available on other

bonds of like risk and maturity.

B) identify the cash flows the holder of the bond will receive.

C) contact the holder of the bond.

D) none of the above.

58) A change in the current yield ________ signals a change in the same direction of the yield to

maturity.

A) never

B) rarely

C) always

D) often

59) By the time the subprime financial crisis hit in force, Fannie and Freddie had ________

subprime and Alt-A assets on their books.

A) over $1 trillion of

B) very few

C) been prohibited from holding

D) none of the above

1) Firms and individuals use the money markets primarily to warehouse funds for short

periods of time until a more important need or a more productive use for the funds arises.

2) The primary issuers of capital market securities are local governments and corporations.

3) Capital market securities are less liquid and have longer maturities than money market

securities.

4) Governments never issue stock because they cannot sell ownership claims.

5) To sell an old bond when rates have risen, the holder will have to discount the bond until the

yield to the buyer is the same as the market rate.

6) Most of the time, the interest rate on Treasury notes is below that on money market securities

because of their low default risk.

7) Municipal bonds that are issued to pay for essential public projects are exempt from federal

taxation.

8) Most municipal bonds are revenue bonds rather than general obligation bonds.

9) Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be

redeemed at the maturity date.

10) Registered bonds have now been largely replaced by bearer bonds, which do not have

coupons.

11) A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the

bond issue each year.

12) Debentures are long-term unsecured bonds that are backed only by the general

creditworthiness of the issuer.

13) In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to

finance the purchase of another firm’s stock.

14) A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and

interest in the event the issuer defaults.

15) The Commodity Futures Modernization Act (2000) removed derivative securities, such as

credit default swaps, from regulatory oversight.

16) The current yield on a bond is a good approximation of the bond’s yield to maturity when the

bond matures in five years or less and its price differs from its par value by a large amount.

17) The secondary market is where new issues of stocks and bonds are introduced.

18) General obligation bonds have specific assets pledged as security or specific sources of

revenue allocated for their repayment.

1) What is the purpose of the capital market? How do capital market securities differ from

money market securities in their general characteristics?

Topic: Chapter 12. 1 Purpose of the Capital Market