Finance Chapter 13 When Investor Purchases Bond She Pays Accrued

Chapter 13 The Bond Market

TRUE/FALSE

equal if a bond sells for its par value.

risk associated with purchasing these securities.

of a bond’s indenture.

the terms of the indenture.

receives accrued interest from the seller.

issue bearer bonds with coupons attached.

bonds is the possibility of default.

bonds because the federal government has the power to tax

and print money.

maturity tend to have different yields.

determined when issued and do not change.

bonds but distributed only twice a year.

long–term bonds have greater yields.

short–term rates exceed long–term rates.

with changes in interest rates.

investment in a zero coupon bond occurs when the bond

matures.

European nation.

value of the dollar rises, that individual earns a larger

return on the investment.

income is increased.

stock instead of cash.

issuing firm is currently having financial problems.

term bond.

purchase preferred stock instead of bonds issued by the

same company.

a regular coupon bond.

advantages.

certainty.

bond is that cash is initially conserved.

be achieved with ten or fewer bonds.

security should include the sale price of bond as well as

interest received.

it is harder for the firm to retire the debt.

sinking fund.

difference between the principal amount and the purchase

price produces taxable income.

retirement of the bond.

requires a mandatory payment by the firm.

interest rates rise.

penalty, which must be paid to the bondholder in partial

compensation for the early retirement of the bond.

MULTIPLE CHOICE

a. interest payments

b. maturity date

c. voting rights

d. an indenture

of a bond increases, generally

a. the coupon rate rises

b. the coupon rate falls

c. the riskiness of the bond falls

d. the price of the bond rises

1. short–term rates exceed long–term rates

2. long–term rates exceed short–term rates

3. the Federal Reserve is following a tight

monetary policy

4. the Federal Reserve is following an easy

monetary policy

a. 1 and 3

b. 1 and 4

c. 2 and 3

d. 2 and 4

a. “A” are investment grade bonds

b. “B” stands for a “bearer” bond

c. “C” stands for a convertible bond

d. “D” represents a debenture

1. possibility of default

2. higher interest rates

3. higher inflation

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. all of the above

a. pays accrued interest

b. receives accrued interest

c. pays accrued dividends

d. receives accrued dividends

a. riskier than convertible bonds

b. secured debt obligations

c. a type of debenture

d. bonds with low credit ratings

a. mortgage bonds

b. secured debt

c. preferred stock

d. short–term debt obligations

a. do not mature

b. are an example of a discount bond

c. have fluctuating coupons

d. are nonmarketable securities

a. pays no interest

b. pays interest only at maturity

c. is a high–risk debt instrument

d. is a bond in default

a. a quality bond whose credit rating has declined

b. a firm in financial difficulty

c. a junk bond in default

d. a firm being liquidated

a. distributes interest in cash and additional debt

b. combines features of zero coupon bonds and

secured bonds

c. has a period of no coupon and a period with a

high coupon

d. conserves the investor’s cash

a. experience stable prices

b. conserve the firm’s cash

c. reduce the firm’s use of financial leverage

d. pay interest only at maturity

a. have a sinking fund

b. are issued and retired in a series

c. are a type of income bond

d. are primarily issued by the federal government

1. being called

2. a sinking fund

3. being repurchased

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. all of the above

a. are sold at a discount

b. are sold for a premium

c. accrue interest at maturity

d. cannot be called

a. investor against premature retirement of the bond

b. investor from default

c. issuer from rising interest rates

d. issuer from the bondholder requesting payment

a. avoids personal income taxation

b. is paid by the buyer of the bond to the

seller of the bond

c. is the result of the possibility of the

bond defaulting

d. applies only to zero coupon bonds

a. interest rates have risen

b. interest rates have fallen

c. the company’s dividend is increased

d. the company’s dividend is decreased

PROBLEMS

1. A bond matures in 2020 and has an annual coupon of 3.65

percent, payable on January 1 and July 1. The current price

of the $1,000 bond is $978. On February 1, you purchase

$10,000 face amount, and your broker charges a $25

commission. How much must you remit for the purchase?

2. You own a $10,000 bond that pays interest of 5.6

percent annually. If you are in the 30 percent federal

income tax bracket, what is the annual tax owed if the bond

is (a) in your regular personal account or (b) in your

traditional retirement account (IRA)?

3. A $1,000 zero coupon bond matures in five years and

sells for $784 to yield 5 percent. The accrued interest for

the first year is $39. You are in the 30 percent federal

income tax bracket. What is tax owed in the interest if the

bond is (a) in your regular personal account or (b) in your

Roth retirement account (IRA)?

SOLUTIONS TO PROBLEMS