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Fundamentals of Investing, 13e (Smart)
Chapter 10 Fixed-Income Securities
10.1 Learning Goal 1
1) Bondholders can earn income both from interest and from capital gains.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2) The primary reasons for owning bonds are the income they provide and also the stability
they bring to an investment portfolio.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) The bond market has occasionally outperformed the stock market for several years at a time.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
4) As investors approach retirement age, they should hold more bonds and less stock.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5) Bondholders usually have capital gains when interest rates are rising.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
2
6) Bond prices are stable over any five- to ten-year period.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Bonds are typically a good investment choice for an individual who is seeking long-term
preservation of capital.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
8) Bonds are immune from most of the types of risk that affect stocks.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
9) Which of the following are advantages of owning bonds?
I. diversification properties
II. higher long-term returns than equity holdings
III. current income
IV. lower risk than stocks
A) I and II only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 1
3
10) When bonds are initially added to an all-equity portfolio the
A) level of risk of the portfolio is impacted more than the rate of return.
B) rate of return on the portfolio is impacted more than the level of risk.
C) level of risk and the rate of return are equally impacted.
D) rate of return is not impacted but the level of risk is lowered.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
11) the phenomenon known as “flight to quality” causes yields on government bond and
corporate bonds
A) to rise in tandem.
B) to fall in tandem.
C) to move in opposite directions.
D) to become less volatile.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
12) Which of the following types of risk affect bonds?
I. call risk
II. business risk
III. purchasing power risk
IV. liquidity risk
A) III and IV only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4
13) The bond market is considered bearish when
A) market interest rates are low or falling.
B) market interest rates are high or rising.
C) the risk-free rate of return exceeds the required rate of return.
D) more bonds are called than issued over a given period of time.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
14) Under normal economic conditions, the major source of risk faced by investors who
purchase investment grade bonds is
A) purchasing power risk.
B) interest rate risk.
C) liquidity risk.
D) default risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
15) In a severe recession, the major source of risk faced by investors who purchase corporate
bonds is
A) purchasing power risk.
B) interest rate risk.
C) liquidity risk.
D) default risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5
16) When interest rates are falling, most of the return on bonds will come from
A) inflation gains.
B) interest income.
C) capital gains.
D) risk premiums.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
17) Which type of risk is based on the financial integrity of a bond issuer?
A) liquidity risk
B) call risk
C) default risk
D) interest rate risk
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
18) Bond investors will experience capital gains when
A) market interest rates are high and falling.
B) market interest rates are high and rising.
C) the required rate of return exceeds the risk-free rate of return.
D) more bonds are called than issued over a given period of time.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
6
19) Discuss at least three differences between investing in stocks and investing in bonds.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
10.2 Learning Goal 2
1) A coupon rate of 6% means that the bond will pay $60 interest every 6 months if interest is
paid semi-annually.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 2
2) The interest payment on a 6% coupon, semi-annual bond is $30 every 6 months.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 2
3) When a bond is called, the bondholder generally faces a rate of return that is lower than
expected.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7
4) The holder of a serial bond receives both semi-annual interest and principal payments over
the life of the bond.
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into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) The risk premium component of a bond’s market interest rate is related to the characteristics
of the particular bond and its issuer.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
6) Most bonds pay interest quarterly.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7) Debt instruments with maturities of 2 to 10 years are known as notes.
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into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8) A bond which is noncallable for a period of time after which it is freely callable is called a
deferred call bond.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8
9) As a bond approaches maturity, the call premium typically rises.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
10) A single bond issue with multiple maturity dates is called a
A) callable bond.
B) premium bond.
C) serial bond.
D) term bond.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
11) Subordinated debentures
A) have a lower claim on assets than simple debentures.
B) are secured by some physical asset.
C) are financial assets held in trust by a third party.
D) are the safest form of corporate bonds.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
12) A note is generally defined as debt with an initial term to maturity of
A) zero to two years.
B) one year or less.
C) two to ten years.
D) ten to thirty years.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9
13) Under which bond provision is the issuer required to retire portions of the bond issue prior
to maturity?
A) call feature
B) refunding provision
C) subordination clause
D) sinking fund feature
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14) Most bonds pay interest
A) annually.
B) semi-annually.
C) quarterly.
D) monthly.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15) A bond which has a deferred call
A) does not have to be redeemed when it reaches maturity.
B) can be retired at any time prior to maturity provided six months notice is given.
C) cannot be retired for a specific period of time after which it can be retired at any time.
D) can be retired at any time during the initial call period but after that time can not be
redeemed prior to maturity.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10
16) A bond’s sinking fund provisions specifies
A) which assets are available to secure the bond.
B) how the issuer will pay off the bond over time.
C) which bond issues have a higher claim on the firm’s assets in case the firm goes under.
D) a diminishing series of interest payments as the bond approaches maturity.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
17) When a bond’s rating improves from A to AA
A) the coupon rate will fall and the price will rise.
B) both the coupon rate and the price will rise.
C) both the coupon rate will stay the same and the price will fall.
D) the coupon rate will stay the same, but the price will rise.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
18) Which of the following statements about bond rating agencies is true?
A) Bonds are rated by an agency of the federal government.
B) Bonds rated AAA are guaranteed by the company that issues the rating.
C) During the financial crisis of 2007-2009 it became clear that rating agencies severely
underestimated the risks of some issues.
D) Bond rating agencies are paid by investors and receive no compensation from the bonds’
issuer.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2