11) Junk bond prices tend to be volatile just like common stock prices.
12) The various CMO tranches can have significantly different degrees of prepayment risk.
13) Which one of the following statements concerning Treasury bonds is correct?
A) The coupon rate of a TIPS is adjusted periodically in response to changes in the rate of
inflation.
B) Treasury bonds have maturity dates ranging from two to ten years.
C) Interest earned on Treasury bonds is tax-exempt at the federal level.
D) All Treasury securities are backed by the “full faith and credit” of the U.S. government.
14) Which of the following statements about U.S. Treasury bonds are true?
I. They are backed by the “full faith and credit” of the U.S. government.
II. They are all indexed and adjusted for inflation.
III. They trade in a very thin market.
IV. They are traded in both U.S. and foreign markets.
A) I, II and IV only
B) I, III and IV only
C) II and III only
D) I and IV only
15) Debt securities issued by the Federal Home Loan Bank, the Student Loan Marketing
Association and the Government National Mortgage Association are known as
A) agency bonds.
B) organizational bonds.
C) municipal bonds.
D) Treasury bonds.
16) Which of the following statements concerning agency bonds are correct?
I. Agency issues are normally noncallable or carry lengthy call deferment features.
II. Agency issues usually provide yields that are somewhat below the market yields for
Treasuries.
III. All agency issues are backed by the full faith and credit of the U.S. government.
IV. New agency bonds are all issued in book entry form.
A) I and III only
B) I and IV only
C) II, III and IV only
D) I, II and III only
17) Municipal bonds can be either general obligation bonds or revenue bonds. Of these two types
of municipal bonds, only general obligation bonds
A) are specifically serviced by the income generated from particular projects.
B) are backed by the full faith and credit of the issuer.
C) repay the principal only if a sufficient level of revenue is generated.
D) have the principal and interest guaranteed by a third party.
18) Which of the following statements are correct concerning municipal bonds?
I. Yields on municipal bonds are usually lower than yields on Treasury bonds.
II. Municipal bonds are most appealing to individuals with high incomes.
III. Interest on a municipal bond is exempt from federal income tax.
IV. Municipal bonds are less risky than Treasury bonds.
A) I, II, III and IV
B) I, II and III only
C) II, III and IV only
D) II and III only
19) Jennifer is in the 25% federal income tax bracket and the 3% state income tax bracket. If
Jennifer purchases a municipal bond yielding 4.25%, what is her after-tax equivalent yield if the
bond income is exempt from both federal and state taxes?
A) 5.67%
B) 5.84%
C) 5.90%
D) 6.01%
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20) What is the tax-equivalent yield of a double tax-free 5% municipal bond if the investor is in
the 28% federal and 7% state tax brackets?
A) 6.94%
B) 7.14%
C) 7.47%
D) 7.69%
21) Which one of the following statements concerning the tax treatment of municipal bonds is
correct?
A) The interest income on municipal bonds is subject to federal income tax.
B) The capital gain realized on the sale of a municipal bond is tax-free income.
C) Interest income on a municipal bond is usually exempt from state and local income taxes if
the bond is issued by the state or locality in which the investor resides.
D) Municipal bonds receive no special income tax treatment.
22) Martin is trying to decide which one of the following bonds he should purchase. All the
bonds have the same maturity date and all have approximately the same level of risk. The
general level of interest rates is declining. Martin is in the 33 percent federal income tax bracket
and the 8 percent state income tax bracket. The municipal bonds are from his home state.
Which bond should Martin purchase if he wishes to hold it for the long term?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
23) The denomination of most corporate bonds is ________ and the maturities generally range
from ________.
A) $1,000; 5 to 10 years
B) $1,000; 25 to 40 years
C) $100,000; 5 to 10 years
D) $100,000; 25 to 40 years
24) Which of the following statements concerning equipment trust certificates are correct?
I. Equipment trust certificates are typically used to raise funds for purchasing airplanes and
railroad engines.
II. Equipment trust certificates are usually issued with a single maturity date.
III. Equipment trust certificates normally mature in 20 to 30 years.
IV. Equipment trust certificates generally offer above-average yields.
A) I and IV only
B) II and IV only
C) I and III only
D) I, III and IV only
25) Which one of the following statements correctly describes the unique feature of GNMA
pass-through securities?
A) The interest income on a GNMA is exempt from state and federal tax.
B) GNMAs consistently have lives of 25-30 years.
C) GNMAs are backed by the full faith and credit of the issuing state.
D) GNMAs pay income to holders on a monthly basis.
26) Which one of the following statements correctly describes the major drawback of a zero–
coupon bond?
A) Unless the bond is held in a tax-sheltered account, the investor must pay taxes on the annual
accrued interest even though no interest is actually received.
B) The conversion feature found on most zero-coupon bonds generally requires the investor to
switch to a coupon-bearing bond after a period of 5 years.
C) The lack of an annual coupon basically prohibits the investor from locking in a high rate of
return.
D) Because there is no reinvestment of a coupon payment, large capital losses accrue when
interest rates decline.
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27) Treasury strip bonds are popular because
I. they are high-quality bonds.
II. they have a wide range of maturities.
III. they are very liquid.
IV. their income is not taxed until the bonds mature.
A) I and III only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV
28) One of the major problems associated with mortgage-backed securities is that
A) the principal portion of each payment is considered taxable income.
B) they are refundable.
C) they are self-liquidating.
D) they are serial issues.
29) Which of the following characteristics apply to collateralized mortgage obligations?
I. All bondholders receive a pro-rata share of all interest payments.
II. CMOs are derivative securities created from mortgage-backed bonds.
III. All principal payments are paid to the shortest remaining tranche.
IV. CMOs have definite maturity dates for each tranche.
A) I and II only
B) I and III only
C) I, II and III only
D) II, III and IV only
30) The practice of bundling mortgages or other types of loans into pools and selling pieces of
the pool as bond-like instruments to investors is known as
A) securitization.
B) privatization.
C) collateralization.
D) fractionalization.
31) Collateralized mortgage obligations are relatively safe investments except
A) when interest rates rise.
B) when inflation is high.
C) when home prices decline.
D) when mortgage holders refinance frequently.
32) Pass-through securities backed by pools of auto loans, credit card bills, and computer leases
are known as
A) PIK bonds.
B) REIMCs.
C) ABSs.
D) Fannie Maes.
33) The practice of bundling mortgages or other loans into pools and selling shares of the pool as
bond-like instruments is known as
A) securitization.
B) privatization.
C) collateralization.
D) fractionalization.
34) The first tranche of a collateralized mortgage obligation has
A) the greatest default risk.
B) the greatest interest rate risk.
C) the greatest prepayment risk.
D) the greatest total risk.
35) 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
36) 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.
37) Define zero-coupon bonds and list some advantages and some disadvantages of these
instruments.
1) The biggest risk with foreign bonds is the risk of default.
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2) Foreign companies sometimes issue bonds which pay interest and principal in U. S. dollars.
3) After the U. S. dollar, bonds denominated in euros are the largest segment of the global bond
market.
4) Yankee bonds are issued by the U.S. government, but sold only to foreign investors.
5) An American investor who holds euro-denominated bonds will profit if the euro weakens
against the dollar.
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.
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.
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.
9) Which of the following statements are correct concerning Eurodollar bonds?
I. Initial offerings of Eurodollar bonds are sold in U.S. bond markets.
II. Eurodollar bonds are denominated in dollars.
III. The Eurodollar market is dominated by foreign-based investors.
IV. Eurodollar bonds originate outside the United States.
A) II and III only
B) I and IV only
C) II, III and IV only
D) I, II and IV only
10) Eurodollar bonds are
A) purchased with dollars but redeemed in euros.
B) purchased with dollars but redeemed in euros.
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.A.
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
12) From the viewpoint of a U.S. resident, describe the merits of investing in foreign bonds.
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.
2) The coupon rate on convertible bonds is usually higher than the coupon rate on equivalent
bonds that are not convertible.
3) The conversion ratio denotes the number of shares for which a convertible bond can be
exchanged.
4) Convertible bonds are especially attractive when stock prices are falling.
5) LYON’s or liquid yield option notes are a type of convertible security.
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
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.
8) 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
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
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.
11) What are the major factors that affect the price of convertible bonds?