Chapter 07: Bond Markets
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Page 1
1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.
a.
Bearer
b.
Registered
c.
Treasury
d.
Corporate
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
2. The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial
proceeds received from the bond offering.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
3. Note maturities are usually ____, while bond maturities are ____.
a.
b.
c.
d.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
4. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a.
annual
b.
semiannual
c.
quarterly
d.
monthly
ANSWER:
b
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Page 2
5. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
a.
50
b.
70
c.
10
d.
5
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
6. Interest earned from Treasury bonds is
a.
exempt from all income tax.
b.
exempt from federal income tax.
c.
exempt from state and local taxes.
d.
subject to all income taxes.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
7. Treasury bond auctions are normally conducted only at the beginning of each year.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 07: Bond Markets
Copyright Cengage Learning. Powered by Cognero.
Page 3
8. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be
purchased.
a.
Competitive
b.
Noncompetitive
c.
Negotiable
d.
Non-negotiable
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
9. Treasury bond dealers
a.
quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
b.
profit from a very wide spread between bid and ask prices in the Treasury securities market.
c.
may trade Treasury bonds among themselves.
d.
make a primary market for Treasury bonds.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
10. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
11. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six
months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after
six months will be $____.
a.
250
b.
255
c.
500
d.
510
Chapter 07: Bond Markets
Copyright Cengage Learning. Powered by Cognero.
Page 4
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
12. Bonds issued by ____ are backed by the federal government.
a.
the Treasury
b.
AAA-rated corporations
c.
state governments
d.
city governments
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
13. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a.
supported by the municipal government’s ability to tax; supported by the municipal government’s ability to tax
b.
supported by the municipal government’s ability to tax; supported by revenue generated from the project
c.
always subject to federal taxes; always exempt from state and local taxes
d.
typically zero-coupon bonds; typically zero-coupon bonds
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.
a.
remain unchanged
b.
fall
c.
rise
d.
none of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
Chapter 07: Bond Markets
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Page 6
d.
savings institution
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
19. A call provision on bonds normally
a.
allows the firm to sell new bonds at par value.
b.
gives the firm to sell new bonds above market value.
c.
allows the firm to sell bonds to the Treasury.
d.
allows the firm to buy back bonds that it previously issued.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
20. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could
achieve a lower financing rate without exchange rate risk by denominating the bonds in
a.
dollars.
b.
euros and making payments from U.S. headquarters.
c.
euros and making payments from its German subsidiary.
d.
dollars and making payments from its German subsidiary.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
21. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a
lower price if the bonds are called for any other reason.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
Chapter 07: Bond Markets
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Page 8
periods.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
26. ____ bonds have the most active secondary market.
a.
Treasury
b.
Zero-coupon corporate
c.
Junk
d.
Municipal
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
27. ____ are not primary purchasers of bonds.
a.
Insurance companies
b.
Finance companies
c.
Mutual funds
d.
Pension funds
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
28. Leveraged buyouts are commonly financed by the issuance of:
a.
money market securities.
b.
Treasury bonds.
c.
corporate bonds.
d.
municipal bonds.
ANSWER:
c
POINTS:
1
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Page 9
29. When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The
amount of the repayment may be tied to a Treasury bond price index or even to a stock index.
a.
auction-rate securities
b.
structured notes
c.
leveraged notes
d.
stripped securities
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.06
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
30. Which of the following statements is true regarding STRIPS?
a.
They are issued by the Treasury.
b.
They are created and sold by various financial institutions.
c.
They are not backed by the U.S. government.
d.
They have to be held until maturity.
e.
All of the above are true regarding STRIPS.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
31. (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The
bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin’s yield to
maturity is ____ percent.
a.
9.96
b.
10.00
c.
10.33
d.
10.24
e.
none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 10
32. Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to
maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a.
12
b.
9
c.
10.5
d.
more information is needed to answer this question
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
33. Which of the following is not true regarding zero-coupon bonds?
a.
They are issued at a deep discount from par value.
b.
Investors are taxed annually on the amount of interest earned, even though the interest will not be received
until maturity.
c.
The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax
purposes, even though it does not pay interest.
d.
Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and
individual retirement accounts.
e.
All of the above are true.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
34. Which of the following is not true regarding the call provision?
a.
It typically requires a firm to pay a price above par value when it calls its bonds.
b.
The difference between the market value of the bond and the par value is called the call premium.
c.
A principal use of the call provision is to lower future interest payments.
d.
A principal use of the call provision is to retire bonds as required by a sinking-fund provision.
e.
A call provision is normally viewed as a disadvantage to bondholders.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
Chapter 07: Bond Markets
Copyright Cengage Learning. Powered by Cognero.
Page 12
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
39. When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as
pension funds, bond mutual funds, and insurance companies.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
40. Rule 144A allows small individual investors to trade privately placed bonds (and some other securities) with each
other without requiring the firms that issued the securities to register them with the SEC.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
41. Rule 144A creates liquidity for securities that are privately placed.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.07.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
42. Corporate bonds are more standardized than stocks.