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CHAPTER 8
TRUE/FALSE QUESTIONS
than commercial banks.
bonds.
economic growth.
market for junk bonds developed.
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by the assets financed.
guarantees.
the 34 percent tax bracket is 5.94 percent.
either at specific date after the date of issue and every 1 to 5 years thereafter or when and
if the firm takes specified actions such as being acquired, acquiring another company, or
issuing a large amount of additional debt are called.
maturity, the higher the cost.
conversion price is greater than the market price of the stock.
at a stated price prior to maturity.
MULTIPLE-CHOICE QUESTIONS
a. common stocks
b. convertible bonds
c. commercial paper
d. mortgages
the U.S. because
a. they help provide marketability for capital market claims.
b. they have increased people’s willingness to buy capital market claims.
c. they make people more willing to invest because they can more easily diversify
their risk.
d. all of the above
a. financial institutions
b. state and local governments
c. federal government
d. households and non-profit organizations
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a. new plant and equipment.
b. seasonal inventory needs.
c. a quarterly dividend payment.
d. the sale of common stock.
a. Treasury debt
b. federal agency debt
c. mortgage debt
d. corporate debt
a. default
b. price
c. liquidity
d. foreign exchange
$1,000,000 and a 2.8 percent annual coupon (paid semiannually). What will the first
coupon payment be if the semiannual inflation over the first six months is 1.2%?
a. $14,168
b. $14,000
c. $28,336
d. $28,000
e. $12,336
2.4%. What is the market’s estimate of the annual inflation rate over the next three years?
a. 1.1%
b. 1.6%
c. 4.5%
d. 2.4%
e. 2.1%
following bond investor risks?
a. default risk
b. price risk
c. reinvestment risk
d. foreign exchange risk
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a. STRIPs are sold directly by the Treasury Department
b. When a STRIP is created, all interest payments become one security and the
principal payment becomes the other.
c. Many small investors prefer STRIPs because they require a lower minimum
investment than original Treasury notes and bonds.
d. Treasury securities dealers create STRIPs because they expect to sell the created
zero-coupon securities for more than what they paid for the original Treasury
security.
e. None of the above statements is true.
a. direct placement.
b. negotiated bids.
c. competitive bids.
d. private placement.
a. commercial bank
b. casualty insurance company
c. mutual fund
d. individuals in low tax brackets
a. inflation-protected bonds
b. serial bonds
c. general obligation bonds
d. revenue bonds
(all with similar default risk)?
a. 7% municipal bond
b. 10% corporate bond
c. 11% mortgage
d. 9% Treasury bond
respectively, at what marginal tax rate would an investor be indifferent between the two?
a. 18%
b. 25%
c. 30%
d. 33%
e. 35%
respectively, an investor in the 34 percent marginal corporate tax bracket would purchase
a. the tax-exempt bond.
b. the corporate bond.
c. either security (i.e., the investor is indifferent)
d. the security with the higher pre-tax yield.
e. both a and d
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a. property and casualty insurance companies
b. commercial banks
c. households
d. mutual funds
e. pension funds
a. the federal government
b. non profit organizations
c. state and local government agencies
d. nonfinancial businesses.
a. has a call provision.
b. has low default risk.
c. can be converted to stock.
d. is listed on an exchange.
a. have to be registered with SEC.
b. never trade in the secondary market.
c. can only be sold to large, sophisticated investors (e.g., financial institutions).
d. cannot be originally sold to less than 35 investors.
e. both c and d.
equities because
a. they have special features (e.g., call provisions) that make them difficult to value.
b. they are long-term securities, which tend to be riskier and less marketable.
c. both a and b
d. Corporate bonds are in fact not less marketable than money market instruments
and corporate equities.
a. serial.
b. debenture.
c. sinking fund.
d. call provision.
a. securities exchanges such as NYSE
b. competitive sales
c. negotiated sales
d. private placement
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securities in which market?
a. municipal bond market
b. junk bond market
c. investment-grade bond market
d. secondary market
e. subprime mortgage market
a. life insurance companies
b. savings & loans association
c. pension funds
d. all of the above
reasons?
a. tax sheltering and high yield
b. liquidity and high after-tax returns
c. liability maturity matching and high after-tax returns
d. low risk and liquidity
a. interest rate risk
b. default risk
c. purchasing power risk
d. reinvestment risk
e. exchange rate risk
corporate bonds?
a. Interest paid on munis is tax-exempt, while interest paid on corporate bonds is
not.
b. Munis often have a range of maturities (are serial issues) but corporate bonds do
not.
c. Unlike corporate bonds, munis are rated by bond-rating agencies such as
Moody’s.
d. All of the above are differences between munis and corporate bonds.
the
a. guarantor
b. investor
c. borrower
d. none of the above
a. financial guarantees.
b. investment banking.
c. a bond indenture.
d. a commercial bank seasonal loan.
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a. the profit from the loan revenue.
b. the profit from the interest on the asset-backed securities issued.
c. the profit from the fees paid for financial guarantees.
d. the profit from the difference between the loan revenue and the costs of
guarantees and return on the asset-backed securities.
if
a. the financial market will pay more for the loan portfolio than the issued asset-
backed securities.
b. the financial market will pay more for the issued asset-backed securities than the
loan portfolio.
c. a financial guarantee is obtained from a commercial bank.
d. the borrowers permit their loan to be securitized.
e. both a and d
securities?
a. Cash-collateral accounts that are deposits set aside to cover losses
b. Financial guarantees from bond insurance companies
c. Standby letters of credit from major commercial banks
d. A guarantee to pay from the borrowers
a. Federal Reserve System
b. Treasury Department
c. National Association of Security Dealers (NASD)
d. Federal Deposit Insurance Corporation
e. Securities and Exchange Commission
a. foreign bonds
b. American depository receipts
c. Yankee bonds
d. Samurai bonds
markets:
a. the globalization of business activity
b. increased volatility in foreign exchange rates
c. Improved computer and telecommunications technology
d. the reduction in trade barriers and standardization of regulations.
a. to sell the bond back to the corporation at the original purchase price.
b. to sell the bond back to the corporation at a stated premium.
c. to sell the bond back to the corporation at the current market value.
d. to sell the bond back to the corporation at par.
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for you to buy this bond is
a. $974.38
b. $975.42
c. $974.69
d. $975.77
ceteris paribus?
a. AAA rated noncallable corporate bond with a sinking fund.
b. AA rated callable corporate bond without a sinking fund
c. AA rated callable corporate bond with a sinking fund
d. AAA rated callable corporate bond with a sinking fund
ESSAY QUESTIONS
1. Compare and contrast the characteristics of the securities of the money market with those of the
capital market.
2. What might determine whether an individual investor buys corporate or municipal bonds? Give
an example.
3. List the risks faced by bond investors.
4. U.S. Treasury STRIPs are of interest to individuals with IRA’s or $401k pension plans. Why?
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5. What factors have contributed to the increased globalization of bond markets?
6. You check Wall Street Journal and find information regarding a principal STRIP that will
mature in 7 years. The price quote per hundred of par for this STRIP is 85.75%. Using
semiannual compounding, what is the promised yield to maturity on the STRIP?