Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements is false?
1)
A)
In the event of default, the assets not pledged as collateral for outstanding bonds cannot be
used to pay off the holders of subordinated debentures until all more senior debt has been
paid off.
B)
When a firm conducts a subsequent debenture issue that has lower priority than its
outstanding debt, the new debt is known as a subordinated debenture.
C)
Because more than one debenture might be outstanding, the bondholder’s priority in claiming
assets in the event of default, known as the bond’s seniority, is important.
D)
Most debenture issues contain clauses restricting the company from issuing new debt with
equal or lower priority than existing debt.
2)
What kind of corporate debt must be secured by real property?
2)
A)
Debentures
B)
Mortgage bonds
C)
Notes
D)
Asset–backed bonds
3)
Treasury securities that are semi–annual coupon bonds with original maturities of between 1 and
10 years are called
3)
A)
Treasury notes.
B)
Treasury bonds.
C)
TIPS.
D)
Treasury bills.
4)
Which of the following statements is false?
4)
A)
If the stock price is low so that the embedded warrant is deep out–of–the–money, the
conversion provision is not worth much and the bond’s value is close to the value of a straight
bond—an otherwise identical bond without the conversion provision.
B)
A convertible bond can be thought of as a regular bond plus a special type of call option
called a warrant.
C)
On the maturity date of the bond, the strike price of the embedded warrant in a convertible
bond is equal to the face value of the bond divided by the conversion ratio—that is, the
conversion price.
D)
Calling a convertible bond transfers the remaining time value of the conversion option from
shareholders to bondholders.
5)
What kind of corporate debt can be secured by any specified assets?
5)
A)
Debentures
B)
Notes
C)
Asset–backed bonds
D)
Mortgage bonds
6)
Which of the following statements regarding sinking fund provisions is false?
6)
A)
Because the sinking fund allows the issuer to repurchase the bonds at par, the option to
accelerate the payments is another form of call provision.
B)
Sinking fund provisions usually specify a minimum rate at which the issuer must contribute
to the fund.
C)
With a sinking fund, if a bond is trading at below its face value, because the bonds are
repurchased at par the decision as to which bonds to repurchase is made by lottery.
D)
With a sinking fund, instead of repaying the entire principal balance on the maturity date, the
company makes regular payments into a sinking fund administered by a trustee over the life
of the bond.
7)
What kind of unsecured corporate debt has a maturity of less than 10 years?
7)
A)
Asset–backed bonds
B)
Notes
C)
Mortgage bonds
D)
Debentures
8)
Which of the following statements is false regarding a call provision?
8)
A)
The call price is generally set at or below, and expressed as a percentage of, the bond’s face
value.
B)
A call feature allows the issuer of the bond the right (but not the obligation) to retire all
outstanding bonds on (or after) a specific date (the call date), for the call price.
C)
A call provision allows the issuer to repurchase the bonds at a predetermined price.
D)
The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a
tender offer for the entire issue.
9)
Treasury securities that are standard coupon bonds where the outstanding principal is adjusted for
inflation are called
9)
A)
TIPS.
B)
Treasury notes.
C)
Treasury bills.
D)
Treasury bonds.
10)
Which of the following statements is false?
10)
A)
With registered bonds, on each coupon payment date, the bond issuer consults its list of
registered owners and mails each owner a check (or directly deposits the coupon payment
into the owner’s brokerage account).
B)
In a public offering, the indenture lays out the terms of the bond issue.
C)
The face value or principal amount of the bond is denominated in standard increments, most
often $10,000.
D)
If a coupon bond is issued at a discount, it is called an original issue discount bond.
11)
Bonds issued by a local entity, denominated in the local currency, traded in a local market, but
purchased by foreigners are called
11)
A)
Yankee bonds.
B)
Foreign bonds.
C)
Domestic bonds.
D)
Eurobonds.
Explanation:
12)
What kind of corporate debt has a maturity of less than 10 years?
12)
A)
Mortgage bonds
B)
Notes
C)
Debentures
D)
Asset–backed bonds
13)
Which of the following statements is false?
13)
A)
If the covenants are designed to reduce agency costs by restricting management’s ability to
take negative NPV actions that exploit debt holders, then the reduction in the firm’s
borrowing cost can more than outweigh the cost of the loss of flexibility associated with
covenants.
B)
Once bonds are issued, equity holders have an incentive to increase dividends at the expense
of debt holders.
C)
By including more covenants, issuers increase their costs of borrowing.
D)
Covenants may restrict the level of further indebtedness and specify that the issuer must
maintain a minimum amount of working capital.
14)
Which of the following statements is false?
14)
A)
For private placements, the prospectus must include an indenture, a formal contract between
the bond issuer and a trust company.
B)
In the case of default, the trust company represents the bondholders’ interests.
C)
The trust company represents the bondholders and makes sure that the terms of the indenture
are enforced.
D)
Almost all bonds that are issued today are registered bonds.
15)
Which of the following statements regarding municipal bonds is false?
15)
A)
Revenue bonds are where the local government pledges specific revenues generated by
projects that were initially financed by the bond issue.
B)
Bonds backed by the full faith and credit of a local government are known as general
obligation bonds and are not as secure as bonds backed by the full faith and credit of the
federal government.
C)
Municipal bonds are sometimes also referred to as tax–exempt bonds.
D)
A single municipal bond issue will often contain a number of different maturity dates. Such
issues are often called multi–muni bonds because the bonds are scheduled to mature over a
multiple number of years.
16)
Treasury securities that are semiannual–paying coupon bonds with maturities longer than 10 years
are called
16)
A)
Treasury bonds.
B)
TIPS.
C)
Treasury notes.
D)
Treasury bills.
17)
Which of the following statements is false?
17)
A)
When yields have risen, the issuer will not choose to exercise the call on the callable bond.
B)
The holder of a callable bond faces reinvestment risk precisely when it hurts: when market
rates are lower than the coupon rate she is currently receiving.
C)
A callable bond is relatively less attractive to the bondholder than the identical non–callable
bond.
D)
The issuer will exercise the call option only when the prevailing market rate exceeds the
coupon rate of the bond.
18)
Which of the following statements is false?
18)
A)
If the issuer fails to live up to any covenant, the issuer goes into bankruptcy.
B)
Bond agreements often contain covenants that restrict the ability of management to pay
dividends.
C)
The stronger the covenants in the bond contract, the less likely the issuer will default on the
bond, and so the lower the interest rate investors will require to buy the bond.
D)
Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions
that may undercut its ability to repay the bonds.
19)
Which of the following statements is false?
19)
A)
We can think of the yield to maturity of a callable bond as the interest rate the bondholder
receives if the bond is not called and repaid in full.
B)
The yield to call (YTC) is the annual yield of a callable bond assuming that the bond is called
at the earliest opportunity.
C)
The assumption that underlies the yield calculation of a callable bond—that it will not be
called—is not always realistic, so bond traders often quote the yield to call.
D)
Because the price of a callable bond is higher than the price of an otherwise identical
non–callable bond, the yield to maturity of a callable bond will be lower than the yield to
maturity for its non–callable counterpart.
20)
Which of the following statements is false?
20)
A)
In the case of a Treasury note or Treasury bond offering, the stop–out yield determines the
coupon of the bond and then all bidders pay the discounted value for the bond or note.
B)
In the past, the Treasury has issued bonds with maturities of 30 years (often called long
bonds) and 20 years.
C)
All competitive bidders submit sealed bids in terms of yields and the amount of bonds they
are willing to purchase.
D)
Noncompetitive bidders (usually individuals) just submit the amount of bonds they wish to
purchase and are guaranteed to have their orders filled at the auction.
21)
Which of the following statements is false?
21)
A)
Although the word “bond” is commonly used to mean any kind of debt security, technically a
corporate bond must be secured.
B)
The registered bond system also facilitates tax collection because the government can easily
keep track of all interest payments made.
C)
Asset backed bonds and mortgage bonds are secured debt: Specific assets are pledged as
collateral that bondholders have a direct claim to in the event of bankruptcy.
D)
Notes typically have longer maturities (more than ten years) than debentures.
22)
Which of the following statements regarding private placements is false?
22)
A)
A private placement is a bond issue that does not trade on a public market but rather is sold
to a small group of investors.
B)
In 1990, the U.S. Securities and Exchange Commission (SEC) issued Rule 144A, which
significantly decreased the liquidity of certain privately placed debt.
C)
Because a private placement does not need to be registered, it is less costly to issue.
D)
Privately placed debt need not conform to the same standards as public debt; as a
consequence, it can be tailored to the particular situation.
23)
Bonds issued by a foreign company in a local market, intended for local investors, and
denominated in the local currency are known as
23)
A)
Yankee bonds.
B)
Eurobonds.
C)
Domestic bonds.
D)
Foreign bonds.
Explanation:
24)
Which of the following statements is false?
24)
A)
Agency securities are issued by agencies of the U.S. government or by U.S. government
sponsored enterprises.
B)
Mortgage–backed securities, such as GNMAs, are pass–through securities. That is, each
security is backed by an underlying portfolio or pool of mortgages.
C)
The Government National Mortgage Association (GNMA, or “Ginnie Mae”) is an example of
an enterprise; the Student Loan Marketing Association (“Sallie Mae”) is an example of a
government–sponsored agency.
D)
Sovereign debt is debt issued by national governments.
25)
Which of the following statements is false?
25)
A)
A term loan is a bank loan that lasts for a specific term.
B)
In a leveraged buyout (LBO), a group of private investors purchases all the equity of a public
corporation.
C)
Eurobonds are international bonds that are denominated in the local European currency of
the country in which they are issued.
D)
Global bonds combine the features of domestic, foreign, and Eurobonds, and are offered for
sale in several different markets simultaneously.
Eurobonds are international bonds that are not denominated in the local currency
26)
Treasury securities that are pure discount bonds with original maturities ranging from a few days
to 26 weeks are called
26)
A)
Treasury bills.
B)
TIPS.
C)
Treasury bonds.
D)
Treasury notes.
27)
Which of the following statements regarding the private debt market is false?
27)
A)
The public debt market is larger than the private debt market.
B)
Bank loans are an example of private debt, debt that is not publicly traded.
C)
Private debt has the advantage that it avoids the cost of registration.
D)
Private debt has the disadvantage of being illiquid.
28)
Which of the following statements is false?
28)
A)
An issuer can always retire one of its bonds early by repurchasing the bond in the open
market.
B)
If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of
purchasing the bonds in the open market and call the bonds instead.
C)
When bond yields have increased, by exercising the call on the callable bond and then
immediately refinancing, the issuer can lower its borrowing costs.
D)
To understand how call provisions affect the price of a bond, we first need to consider when
an issuer will exercise its right to call the bond.
29)
Which of the following statements is false?
29)
A)
Municipal bonds (“munis”) are issued by state and local governments.
B)
Zero–coupon Treasury securities with maturities longer than one year also trade in the bond
market.
C)
Municipal bonds’ distinguishing characteristic is that the income on municipal bonds is not
taxable at the federal level.
D)
Treasury securities are initially sold to the public through dealers.
30)
Which of the following statements is false?
30)
A)
The yield to maturity of a callable bond is calculated as if the bond were called at the earliest
opportunity.
B)
A callable bond will trade at a lower price (and therefore a higher yield) than an otherwise
equivalent non–callable bond.
C)
The price of a callable bond can be low when yields are high, but does not rise above the call
value when the yield is low.
D)
Before the call date, investors anticipate the optimal strategy that the issuer will follow, and
the bond price reflects this strategy.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten–year, 8% coupon bond with semi–annual coupon payments. The
bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
31)
What is the Yield to Call (YTC) on this bond?
Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen–year, 7% coupon bond with semi–annual coupon payments. The
bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
32)
What is the Yield to Maturity (YTM) on this bond?
33)
Suppose that in January 2001, the U.S. Treasury issued a ten–year inflation–indexed note with a coupon of 3
1/2%. On the date of issue the consumer price index (CPI) was 175.1. In January 2006, the CPI had increased to
198.3. What coupon payment was made on this bond in January 2006?
Use the information for the question(s) below.
KT Enterprises has just issued a callable (at par) fifteen–year, 7% coupon bond with semi–annual coupon payments. The
bond can be called at par in five years or anytime thereafter on a coupon payment date. It has a current price of 101.
34)
What is the Yield to Call (YTC) on this bond?
Use the information for the question(s) below.
Luther Industries has just issued a callable (at 102) ten–year, 8% coupon bond with semi–annual coupon payments. The
bond can be called at 102 in three years or anytime thereafter on a coupon payment date. It has a current price of 99.
35)
What is the Yield to Maturity (YTM) on this bond?
Answer Key
Testname: C24
12
Answer Key
Testname: C24
13