30
33) The first tranche of a collateralized mortgage obligation has
A) the greatest default risk and the least prepayment risk.
B) the greatest prepayment risk and default risk.
C) the greatest prepayment risk and the least default risk.
D) the least prepayment risk and default risk.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
34) Which of the following statements are correct in respect to high-yield bonds?
I. They are junk bonds with highly unpredictable rates of return.
II. The issuing corporation usually has an excessive amount of debt.
III. They possess a high level of default and market risk.
IV. They are often subordinated debentures.
A) I, II and III only
B) II, III and IV only
C) I and III only
D) I, II, III and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
35) PIK-bonds
A) are relatively safe investments.
B) initially pay interest payments in the form of additional debt.
C) are collateralized by home mortgages.
D) pay monthly interest payments.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
31
36) Describe some of the relatively new investment instruments derived from securitized debt.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
10.5 Learning Goal 5
1) The biggest risk with foreign pay bonds issued by the German government is the risk of
default.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 5
2) Foreign companies sometimes issue bonds which pay interest and principal in U. S. dollars.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
3) After the U. S. dollar, bonds denominated in euros are the largest segment of the global bond
market.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
32
4) Yankee bonds are issued by the U.S. government, but sold only to foreign investors.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5) An American investor who holds euro-denominated bonds will profit if the euro weakens
against the dollar.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) One type of foreign bond that carries no currency exchange rate risk for a U.S. investor is a
A) Eurodollar bond.
B) foreign-pay bond.
C) PIK bond.
D) Yankee bond.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
7) Which one of the following statements concerning a global view of the bond market is
correct?
A) The United States today accounts for about seventy-five percent of the available fixed-
income securities worldwide.
B) U.S. pay bonds distribute both interest and principal payments in euros.
C) Foreign bonds, like junk bonds, have high default risk.
D) Exchange rate fluctuations influence the returns earned on foreign-pay bond holdings.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
33
8) A type of bond that is issued and traded outside the United States and which is denominated
in U.S. dollars but is not registered with the SEC is
A) a Yankee bond.
B) an issue of the World Bank.
C) an issue of the InterAmerican Bank.
D) a Eurodollar bond.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
9) Annika bought euro denominated bonds when the exchange rate was .909 euro to the dollar.
She paid $11,881 for the bonds. At the end of the year, the bonds were worth 10,600 euro; she
received 400 euro in interest and the exchange rate was .921 euro to the dollar. What was her
holding period return in U.S. dollars?
A) -0.74%
B) 1.85%
C) 0.53%
D) 5.30%
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
10) Eurodollar bonds are
A) purchased with dollars but redeemed in euros.
B) purchased with euros but redeemed in dollars.
C) purchased with dollars, but redeemable in either euros or dollars.
D) purchased and redeemed in dollars but issued by entities outside the U.S.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
34
11) In general, foreign-pay bonds provide ________ rates of return and ________
diversification effects for U.S. investors.
A) non-competitive; positive
B) competitive; positive
C) non-competitive; negative
D) competitive; negative
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
12) From the viewpoint of a U.S. resident, describe the merits of investing in foreign bonds.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
10.6 Learning Goal 6
1) When the call price of a convertible bond stock exceeds the conversion value of the bond,
the issuing company is likely to force conversion by calling the bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) The coupon rate on convertible bonds is usually higher than the coupon rate on equivalent
bonds that are not convertible.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
35
3) The conversion ratio denotes the number of shares for which a convertible bond can be
exchanged.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4) Convertible bonds will retain their value as bonds even if stock prices are falling.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
5) LYON’s or liquid yield option notes are a type of convertible security.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
6) When convertible bonds are first issued
I. the conversion price of the stock is higher than the market price.
II. the market price of the stock is higher than the conversion price.
III. the coupon rate is higher than if the bond were not convertible.
IV. the coupon rate is lower than if the bond were not convertible.
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
36
7) Which of the following is most likely to happen with a convertible bond when the market
price of the stock exceeds the conversion price? The stock does not pay a dividend.
A) The bondholders will immediately convert their bonds to stock.
B) The issuing company will call the bonds and the bondholders will redeem them for the call
price.
C) The issuing company will call the bonds and bondholders will convert them to common
shares.
D) Both the issuing company and the bondholders will wait for the bonds to reach their
maturity date.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
8) Bonhomme Co. issued $1,000 par value bonds with a 6% coupon rate, convertible into 25
share of Bonhomme common stock. When the bonds were issued the stock traded at $25 per
share. The stock is now at $42 per share and pays a $0.10 per share annual dividend. In the
near future
A) the bondholders will voluntarily convert their bonds to stock.
B) The issuing company will call the bonds and the bondholders will redeem them for the call
price (par).
C) The issuing company will call the bonds and bondholders will convert them to common
shares.
D) Both the issuing company and the bondholders will wait for the bonds to reach their
maturity date.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
37
9) Liquid yield option notes or LYONS have which of the following characteristics?
I. convertibility at a fixed conversion ratio
II. high coupon rates
III. a put feature that guarantees the right to redeem the bonds at a prespecified price
IV. convertibility at a fixed conversion price
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
10) Which of the following is a good reason to invest in convertible bonds?
A) They often have higher than normal coupon rates.
B) They offer protection against rising interest rates.
C) They tend to be issued by stable, low-risk companies.
D) They offer predictable income and a chance to profit from an increase in the stock price.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
11) The major attraction of convertible bonds is
A) the option to convert subordinated debentures into senior securities.
B) the option to convert the bond into shares of the company’s stock.
C) the option to convert the bonds into longer term securities when they mature.
D) the absence of a call provision allows the value of the bonds to increase at the same rate as
the company’s stock while the owner still collects interest.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
38
12) Kandy Korn Co. issued convertible bonds with a conversion ratio of 50. The most likely
price of the stock at the time the bonds were issued was
A) $50.
B) $25.
C) $20.
D) $15.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
13) What are the major factors that affect the price of convertible bonds?
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6