Fundamentals of Investments, 8e (Jordan)
Chapter 18 Corporate and Government Bonds
1) Which one of the following best defines a plain vanilla bond?
A) bond secured by agricultural or food inventory
B) bond with relatively standard features
C) unsecured debt
D) bond secured with financial collateral
E) bond that has no coupon payments
2) Which one of the following terms is defined as debt issued without specific collateral pledged
as security?
A) unsecured debt
B) indenture
C) vanilla bond
D) naked bond
E) risk-free bond
3) Which one of the following is an unsecured bond issued by a corporation?
A) indenture
B) general obligation bond
C) plain vanilla bond
D) debenture
E) trust bond
4) Which one of the following is the portion of a prospectus that outlines the contractual terms of
a new bond issue?
A) indenture summary
B) financial disclosure
C) covenant agreement
D) security agreement
E) trust agreement
5) What is the document called that is distributed to potential bondholders and provides detailed
information on the financial position and operations of the bond issuer?
A) indenture summary
B) prospectus
C) trust statement
D) 10K
E) 10Q
6) Which one of the following is an unsecured bond that has a higher claim on a firm’s assets
than other unsecured bonds?
A) plain vanilla bond
B) subordinated debenture
C) refunded bond
D) senior debenture
E) collateral trust bond
7) During a bankruptcy proceeding, Bond A will be paid only if funds remain after the bonds that
have a higher claim on the issuer’s assets have been paid. What type of bond is Bond A?
A) plain vanilla bond
B) senior trust bond
C) junior trust bond
D) subordinated debenture
E) senior debenture
8) Which one of the following is the clause which prevents a bond issuer from issuing new debt
that has seniority over current debt?
A) first-in-line
B) sinking fund
C) call provision
D) affirmation
E) negative pledge
9) Which one of the following accurately describes bond refunding?
A) replacing maturing bonds with a new bond issue
B) calling existing bonds and refinancing those bonds with new debt
C) paying off bonds early with excess cash generated by the firm
D) replacing maturing bonds with an equity issue
E) paying bonds off early to satisfy disgruntled bondholders
10) Which one of the following provisions grants the bondholder the option of selling the bond
back to the issuer at a pre-specified price on pre-specified dates?
A) convertible
B) call
C) put
D) exchange
E) sinking fund
11) Which one of the following provisions grants the bondholder the option of exchanging a
bond for a pre-specified number of shares of stock of the same issuer?
A) put
B) call
C) equity
D) conversion
E) sinking
12) Which one of the following defines an in-the-money bond?
A) secured bond with collateral value that exceeds the bond’s price
B) callable bond with a call price that exceeds the current market price
C) put bond with a put price that exceeds the current market price
D) convertible bond with a call price that exceeds its conversion value
E) convertible bond with a conversion value that exceeds its call price
13) Which one of the following terms is given to the value of a convertible bond that would
equate to the value of a comparable nonconvertible bond?
A) out-of-the money value
B) in-the-money value
C) discounted value
D) external value
E) intrinsic value
14) What is a bond called if it can be converted into shares of stock of a firm other than the bond
issuer?
A) swap bond
B) alternate bond
C) exchangeable bond
D) convertible bond
E) callable bond
15) Term bonds are defined as all bonds in a bond issue having which one of the following
characteristics?
A) sequential maturity dates
B) serial maturity dates
C) multiple maturity dates
D) an identical maturity date
E) renewable maturity dates
16) Bonds issued with a regular sequence of maturity dates are called which one of the
following?
A) callable bonds
B) sequential bonds
C) serial bonds
D) sinking bonds
E) put bonds
17) Which one of the following is an account used to provide for scheduled redemptions of
outstanding bonds?
A) redemption fund
B) sinking fund
C) liquidation account
D) serial account
E) callable account
18) What are the various provisions within a bond indenture that are designed to protect
bondholders by restricting the actions of the issuer called?
A) restrictive actions
B) prohibitions
C) negative conditions
D) protective covenants
E) restrictive amendments
19) Which one of the following identifies a new bond issue as being a private placement?
A) The proceeds of the issue are used for a single project.
B) The issue is marketed through a sole brokerage house.
C) The issue is sold only to individuals rather than to institutional investors.
D) The issue is not made available to the public.
E) The issue names a private individual as the bond trustee.
20) Adjustable-rate bonds are identified by which one of the following characteristics?
A) The coupon rate will increase should the credit rating of the bond decline.
B) Different bonds within the same issue have different coupon rates.
C) Bondholders can defer coupon payments at their discretion.
D) The amount of each coupon payment will depend on the free cash flow of the issuer.
E) The coupon rate changes in response to changes in current market rates.
21) Which one of the following is an assessment of the credit quality of a bond based on the
financial condition of the bond issuer?
A) protective covenant
B) risk analysis
C) credit rating
D) serial report
E) in-the-money status
22) What are the restrictions on investment portfolios that require that all securities held within
the portfolio meet a specified level of safety called?
A) protective covenants
B) negative restrictions
C) prudent investment guidelines
D) safety monitors
E) risk ranges
23) Bonds with relatively high coupons due to their speculative credit ratings are called which
one of the following?
A) investment-grade bonds
B) high-yield bonds
C) prudent risk bonds
D) floating-rate bonds
E) covenant bonds
24) Which of the following are common characteristics associated with corporate bonds?
I. specified cash flows
II. equity ownership
III. call feature
IV. set maturity date
A) I and II only
B) I and IV only
C) II and III only
D) I, II, and IV only
E) I, III, and IV only
25) Which one of the following parties is the largest holder of U.S. corporate bonds?
A) pension funds
B) life insurance companies
C) banks
D) foreign investors
E) individual investors
26) Which one of the following features of corporate bonds has the greatest appeal to pension
fund investors?
A) call provision
B) convertible provision
C) zero repayment risk
D) prospectus availability
E) predictable cash flows
27) A pension fund purchases bonds so that the payments from the bonds provide sufficient cash
inflow in a timely manner to offset the cash outflows from the pension fund. What is this
investment strategy called?
A) cash flow matching
B) cash diversification
C) cash stabilization
D) in-out investing
E) plain vanilla matching
28) Which of the following features would you expect a plain vanilla bond to have?
I. semi-annual coupon payments
II. $1,000 face value
III. stated maturity date
IV. multiple bonds within one issue
A) I and II only
B) II and III only
C) II, III, and IV only
D) I, II, and III only
E) I, II, III, and IV
29) The entire formal contract between a bond issuer and the bondholders is found in which one
of the following documents?
A) prospectus
B) prospectus summary
C) indenture agreement
D) indenture summary
E) trust certificate
30) Which one of the following statements related to callable bonds is correct?
A) Callable bonds are issued at the call price.
B) Callable bonds can be called at any time.
C) Callable bonds are generally called at the market price at the time of the call.
D) Callable bonds are more apt to be called if market interest rates decline.
E) Callable bonds are generally priced higher than comparable noncallable bonds.
31) How much will you be paid if you own a bond that is called under a make-whole call
provision?
A) the face value
B) an amount equal to the par value plus the total amount of the remaining interest payments
C) the present value of all future bond payments that will not be paid because of the call
D) the current market value plus a prespecified call premium
E) an amount equal to the normal maturity value of the bond
32) After the call protection period, which one of the following basically serves as the upper
price limit on a callable bond?
A) present value of all future bond payments discounted at the current market rate of interest
B) face value of the bond
C) call price of the bond
D) current market price of the bond
E) current market price of a comparable noncallable bond
33) Which one of the following statements related to a put bond is correct?
A) Put bonds are generally redeemed at a premium over par value.
B) Put bonds can be redeemed at any time once the put protection period has elapsed.
C) The put feature effectively sets the ceiling price for the bond.
D) The put feature helps protect bondholders from the risk associated with rising interest rates.
E) A putable bond is generally priced lower than a comparable nonputable bond.
34) Which one of the following statements related to convertible bonds is correct?
A) Bondholders forego higher coupon rates in exchange for the conversion option.
B) Convertible bonds are generally issued such that the conversion value is equal to the par
value.
C) The conversion price is equal to the bond’s market value divided by the conversion ratio.
D) The conversion value is equal to the bond’s market price multiplied by the conversion ratio.
E) Bonds should be converted as soon as the conversion value exceeds the face value.
35) Which one of the following statements related to convertible bonds is correct?
A) Convertible bonds have a maximum value equal to the bond’s intrinsic value.
B) Convertible bonds have limited downside risk with unlimited upside potential.
C) A convertible bond is in-the-money when its call price is greater than its conversion value.
D) Convertible bonds must be converted prior to or on the maturity date.
E) Convertible bonds must be converted once they are called.
36) Which one of these statements regarding corporate bond credit ratings is correct?
A) Bonds rated Ba3 or above by Moody’s are considered investment-grade bonds.
B) All bonds issued by the same issuer will have the same credit rating.
C) A bond’s credit spread may be a better indicator of a bond’s risk than its rating.
D) Bond ratings are based solely on the seniority of the bond issue and the protective covenants
by which it is covered.
E) Credit ratings are assigned to the bond issuer, not the bond issue.
37) Which one of the following is another name for a junk bond?
A) high-yield
B) convertible
C) private placement
D) subordinated
E) called
38) What is the method of selling Treasury bills at less than face value called?
A) imputed basis
B) par value method
C) discount basis
D) STRIP basis
E) face value method
39) What is the interest on a Treasury bill called when it is determined by the size of the bill’s
discount from face value?
A) assumed interest
B) imputed interest
C) imaginary interest
D) convergent interest
E) original-issue interest
40) Which one of the following is the Treasury program allowing interest and principal payments
from Treasury notes or bonds to be sold separately?
A) EDGAR
B) TRSTRP
C) TRIPS
D) TZEROES
E) STRIPS