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Essentials of Investments, 11e (Bodie)
1) The invoice price of a bond is the ________.
A) stated or flat price in a quote sheet plus accrued interest
B) stated or flat price in a quote sheet minus accrued interest
C) bid price
D) average of the bid and ask price
2) Sinking funds are commonly viewed as protecting the ________ of the bond.
A) issuer
B) underwriter
C) holder
D) dealer
3) A collateral trust bond is ________.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
4) A mortgage bond is ________.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
5) A debenture is ________.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
6) If you are holding a premium bond, you must expect a ________ each year until maturity. If
you are holding a discount bond, you must expect a ________ each year until maturity. (In each
case assume that the yield to maturity remains stable over time.)
A) capital gain; capital loss
B) capital gain; capital gain
C) capital loss; capital gain
D) capital loss; capital loss
7) Floating-rate bonds have a ________ that is adjusted with current market interest rates.
A) maturity date
B) coupon payment date
C) coupon rate
D) dividend yield
8) Inflation-indexed Treasury securities are commonly called ________.
A) PIKs
B) CARs
C) TIPS
D) STRIPS
9) In regard to bonds, convexity relates to the ________.
A) shape of the bond price curve with respect to interest rates
B) shape of the yield curve with respect to maturity
C) slope of the yield curve with respect to liquidity premiums
D) size of the bid-ask spread
10) A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S.
firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the
following statements is correct?
A) Both bonds are examples of Eurobonds.
B) The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.
C) The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.
D) Neither bond is a Eurobond.
11) The primary difference between Treasury notes and bonds is ________.
A) maturity at issue
B) default risk
C) coupon rate
D) tax status
12) TIPS offer investors inflation protection by ________ by the inflation rate each year.
A) increasing only the coupon rate
B) increasing only the par value
C) increasing both the par value and the coupon payment
D) increasing the promised yield to maturity
13) You would typically find all but which one of the following in a bond contract?
A) a dividend restriction clause
B) a sinking fund clause
C) a requirement to subordinate any new debt issued
D) a price-earnings ratio
14) To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio
A) I only
B) II and III only
C) I and III only
D) I, II, and III
15) According to the liquidity preference theory of the term structure of interest rates, an increase
in the yield on long-term corporate bonds versus short-term bonds could be due to ________.
A) declining liquidity premiums
B) an expectation of an upcoming recession
C) a decline in future inflation expectations
D) an increase in expected interest rate volatility
16) ________ are examples of synthetically created zero-coupon bonds.
A) COLTS
B) OPOSSMS
C) STRIPS
D) ARMs
17) A ________ bond gives the bondholder the right to cash in the bond before maturity at a
specific price after a specific date.
A) callable
B) coupon
C) puttable
D) Treasury
18) TIPS are an example of ________.
A) Eurobonds
B) convertible bonds
C) indexed bonds
D) catastrophe bonds
19) Bonds issued in the currency of the issuer's country but sold in other national markets are
called ________.
A) Eurobonds
B) Yankee bonds
C) Samurai bonds
D) foreign bonds
20) You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to
be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in
year 3 is ________.
A) $30
B) $33
C) $32.78
D) $30.90
21) The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's.
The C rating indicates that the bonds are ________.
A) high grade
B) intermediate grade
C) investment grade
D) junk bonds
22) Bonds rated ________ or better by Standard & Poor's are considered investment grade.
A) AA
B) BBB
C) BB
D) CCC
23) Consider the liquidity preference theory of the term structure of interest rates. On average,
one would expect investors to require ________.
A) a higher yield on short-term bonds than on long-term bonds
B) a higher yield on long-term bonds than on short-term bonds
C) the same yield on both short-term bonds and long-term bonds
D) none of these options (The liquidity preference theory cannot be used to make any of the
other statements.)
24) Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000.
Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in
6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.
A) both bonds will increase in value but bond A will increase more than bond B
B) both bonds will increase in value but bond B will increase more than bond A
C) both bonds will decrease in value but bond A will decrease more than bond B
D) both bonds will decrease in value but bond B will decrease more than bond A
25) You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off
before which one of the following?
A) mortgage bonds
B) senior debentures
C) preferred stock
D) equipment obligation bonds
26) Bonds with coupon rates that fall when the general level of interest rates rise are called
________.
A) asset-backed bonds
B) convertible bonds
C) inverse floaters
D) index bonds
27) ________ bonds represent a novel way of obtaining insurance from capital markets against
specified disasters.
A) Asset-backed bonds
B) TIPS
C) Catastrophe
D) Pay-in-kind
28) The issuer of ________ bond may choose to pay interest either in cash or in additional
bonds.
A) an asset-backed
B) a TIPS
C) a catastrophe
D) a pay-in-kind
29) Everything else equal, the ________ the maturity of a bond and the ________ the coupon,
the greater the sensitivity of the bond's price to interest rate changes.
A) longer; higher
B) longer; lower
C) shorter; higher
D) shorter; lower
30) Which one of the following statements is correct?
A) invoice price = flat price - accrued interest
B) invoice price = flat price + accrued interest
C) flat price = invoice price + accrued interest
D) invoice price = settlement price - accrued interest
31) A ________ bond gives the issuer an option to retire the bond before maturity at a specific
price after a specific date.
A) callable
B) coupon
C) puttable
D) Treasury
32) Which of the following possible provisions of a bond indenture is designed to ease the
burden of principal repayment by spreading it out over several years?
A) callable feature
B) convertible feature
C) subordination clause
D) sinking fund
33) Serial bonds are associated with ________.
A) staggered maturity dates
B) collateral
C) coupon payment dates
D) conversion features
34) In an era of particularly low interest rates, which of the following bonds is most likely to be
called?
A) zero-coupon bonds
B) coupon bonds selling at a discount
C) coupon bonds selling at a premium
D) floating-rate bonds
35) Consider the expectations theory of the term structure of interest rates. If the yield curve is
downward-sloping, this indicates that investors expect short-term interest rates to ________ in
the future.
A) increase
B) decrease
C) not change
D) change in an unpredictable manner
36) A convertible bond has a par value of $1,000, but its current market price is $975. The
current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The
bond's market conversion value is ________.
A) $1,000
B) $884
C) $933
D) $980
37) A convertible bond has a par value of $1,000, but its current market price is $950. The
current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The
bond's conversion premium is ________.
A) $50
B) $190
C) $200
D) $240
38) A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5
years, and is selling today at $785. The actual yield to maturity on this bond is ________.
A) 7.24%
B) 8.82%
C) 9.12%
D) 9.62%
39) A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5
years, and is selling today at an $84.52 discount from par value. The yield to maturity on this
bond is ________.
A) 6%
B) 7.23%
C) 8.12%
D) 9.45%
40) A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5
years, and is selling today at a $75.25 discount from par value. The current yield on this bond is
________.
A) 6%
B) 6.49%
C) 6.73%
D) 7%
41) A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years
but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to
call on this bond is ________.
A) 6%
B) 6.58%
C) 7.2%
D) 8%
42) A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years,
and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today
will be ________.
A) $1,000
B) $1,062.81
C) $1,081.82
D) $1,100.03
43) A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and
has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will
be ________.
A) $856.04
B) $891.86
C) $926.47
D) $1,000
44) A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having
an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago
and the coupon rate is 6%, the invoice price of the bond will be ________.
A) $1,140
B) $1,170
C) $1,180
D) $1,200
45) A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has
a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of
9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%.
The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing
Corp. are, respectively, ________ and ________.
A) .4%; .3%
B) .4%; .5%
C) .5%; .5%
D) .5%; .8%
46) A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond
matures in 16 years, it should sell for a price of ________ today.
A) $458.11
B) $641.11
C) $789.11
D) $1,100.11
47) Yields on municipal bonds are typically ________ yields on corporate bonds of similar risk
and time to maturity.
A) lower than
B) slightly higher than
C) identical to
D) twice as high as
48) You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was
6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was
4%. If you sold the bond after receiving the first interest payment and the bond's yield to
maturity had changed to 3%, your annual total rate of return on holding the bond for that year
would have been approximately ________.
A) 5%
B) 5.5%
C) 7.6%
D) 8.9%
