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Indicate whether the statement is true or false.
1. Subordinated indentures have claims against the firm’s assets that are junior to the claims of both mortgage bonds and
regular indentures.
a. True
b. False
2. Corporate bonds usually pay interest on an annual basis.
a. True
b. False
3. Bond dealers do not have an inventory of bonds.
a. True
b. False
4. Many bonds are listed on the New York Stock Exchange (NYSE).
a. True
b. False
5. Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment
only and a security representing interest payments only.
a. True
b. False
6. Treasury bonds are issued by state and local governments.
a. True
b. False
7. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.
a. True
b. False
8. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.
a. True
b. False
9. The key difference between a note and a bond is that note maturities are usually less than one year, while bond
maturities are one year or more.
a. True
b. False
10. Bonds are issued in the primary market through a telecommunications network.
a. True
b. False
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11. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.
a. True
b. False
12. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds
until maturity.
a. True
b. False
13. Most newly issued municipal bonds are insured because investors are unwilling to purchase uninsured municipal
bonds out of fear that the issuer may default.
a. True
b. False
14. A private bond placement has to be registered with the SEC.
a. True
b. False
15. 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
16. The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds,
pension funds, and insurance companies.
a. True
b. False
17. Structured notes are issued by firms to borrow funds, and the amount of interest and principal to be paid is based on
specified market conditions.
a. True
b. False
18. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.
a. True
b. False
19. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the
bondholders.
a. True
b. False
20. Rule 144A creates liquidity for securities that are privately placed.
a. True
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b. False
21. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments
keep up with the increase in prices over time.
a. True
b. False
22. Savings bonds are bonds issued by the Federal Reserve.
a. True
b. False
23. During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic
periods.
a. True
b. False
24. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.
a. True
b. False
25. Corporate bonds can be placed with investors through a public offering or a private placement.
a. True
b. False
26. Treasury bond auctions are normally conducted only at the beginning of each year.
a. True
b. False
27. 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
28. The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
a. True
b. False
29. High-risk bonds are called trash bonds.
a. True
b. False
30. Rule 144A allows small individual investors to trade privately placed bonds with each other without requiring the
firms that issued the securities to register them with the SEC.
a. True
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b. False
31. 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
32. All of the bonds issued by a particular company will have the same maturity, price, and credit rating.
a. True
b. False
33. Most corporate bonds have a maturity between 2 and 7 years.
a. True
b. False
34. The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit
(default) risk.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
35. A credit rating agency is paid by
a. the purchasers of the bonds that the agency rates.
b. the issuers of the bonds that the agency rates.
c. the taxpayers, because the rating agencies are government agencies.
d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.
36. For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but
makes no guarantee to the issuer.
a. floating value
b. variable proceeds
c. best efforts
d. firm commitment
37. ____ are not primary purchasers of bonds.
a. Insurance companies
b. Finance companies
c. Mutual funds
d. Pension funds
38. Bonds that are not secured by specific property are called
a. chattel mortgage bonds.
b. open-end mortgage bonds.
c. debentures.
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d. blanket mortgage bonds.
39. For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a
specified price.
a. specific value
b. fixed proceeds
c. best efforts
d. firm commitment
40. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
a. 50
b. 70
c. 10
d. 5
41. 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.
42. 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 these are correct.
43. 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.
44. Assume that one year ago you purchased corporate bonds that have no protective covenants. Today, it is announced
that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.
a. rise
b. decline
c. be zero
d. be unaffected
45. 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
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46. A _____ has first claim on specified real property assets, while a _____ is a debenture that has claims against a firm’s
assets that are junior to the claims of mortgage bonds and regular debentures.
a. first mortgage bond; second mortgage bond
b. first mortgage bond; debenture
c. first mortgage bond; subordinated debenture
d. chattel mortgage bond; subordinated debenture
e. None of these are correct.
47. 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 these are true regarding STRIPS.
48. A variable-rate bond allows
a. investors to benefit from declining rates over time.
b. issuers to benefit from rising market interest rates over time.
c. investors to benefit from rising market interest rates over time.
d. None of these are correct.
49. Which of the following institutions is most likely to purchase a private bond placement?
a. commercial bank
b. finance company
c. insurance company
d. savings institution
50. ____ bonds have the most active secondary market.
a. Treasury
b. Zero-coupon corporate
c. Junk
d. Municipal
51. 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 they will not receive the interest until
maturity.
c. The issuing firm is permitted to deduct the amortized discount as interest expense, even though it does not pay
interest.
d. Zero-coupon bonds pay dividends instead of coupons.
e. All of these are correct.
52. Bonds issued by ____ are backed by the federal government.
a. the Treasury
b. AAA-rated corporations
c. state governments
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d. city governments
53. 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
54. Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the
interest or principal payments generated by the debt securities.
a. collateralized debt obligations (CDOs)
b. credit default swaps
c. reverse loans
d. inverted bonds
55. Everything else being equal, which of the following bond ratings is associated with the highest yield?
a. Baa
b. A
c. Aa
d. Aaa
56. Which of the following is NOT an advantage of online bond brokerage services?
a. Pricing is more transparent because investors can easily compare bid and ask spreads.
b. Some services charge commissions, which may be more easily understood than bid and ask spreads.
c. Some brokers have narrowed their spreads so that they do not lose business to competitors.
d. All of these are advantages of online bond brokerage services.
57. Note maturities are usually ____, while bond maturities are ____.
a. less than 10 years; 10 years or more
b. 10 years or more; less than 10 years
c. less than 5 years; 5 years or more
d. 5 years or more; less than 5 years
58. Which of the following is NOT likely to be an example of a protective covenant provision?
a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers’ salaries a firm can pay
c. a limit on the amount of additional debt a firm can issue
d. a call feature
59. The coupon rate of most variable-rate bonds is tied to
a. the prime rate.
b. the discount rate.
c. LIBOR.
d. the federal funds rate.
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60. ____ commonly have maturities of 10 years or longer.
a. Commercial paper certificates
b. Treasury bills
c. Federal fund notes
d. Bonds
61. (Financial calculator required.) Erin, a private investor, 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 these are correct.
62. The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.
a. Federal Ratings Bureau
b. Office of Credit Ratings
c. Office of Agency Supervision
d. Ratings Oversight Commission
63. If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt
and ____ equity, which implies a ____ degree of financial leverage.
a. more; less; lower
b. more; less; higher
c. less; more; higher
d. None of these are correct.
64. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a. annual
b. semiannual
c. quarterly
d. monthly
65. A 10-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
66. 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.
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67. A corporate restructuring in which the corporation seeks to reduce its debt by issuing stock and using the proceeds to
retire its existing bonds is known as a(n)
a. debt-for-equity swap.
b. leveraged buyout.
c. equity-for-debt swap.
d. collateralized debt retirement.
68. If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.
a. decline; more
b. decline; less
c. increase; more
d. None of these are correct.
69. Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.
a. higher; lower
b. lower; lower
c. higher; higher
d. None of these are correct.
70. Which of the following statements is incorrect?
a. A municipal bond must pay a risk premium to compensate for the possibility of default risk.
b. A Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
c. The income earned from municipal bonds is exempt from federal taxes.
d. All of these are correct.
71. A call provision on bonds normally allows the firm to
a. sell new bonds at par value.
b. sell new bonds above market value.
c. sell bonds to the Treasury.
d. buy back bonds that it previously issued.
72. 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
73. Which of the following statements is NOT true regarding STRIPS?
a. They are not issued by the Treasury.
b. They are created and sold by various financial institutions.
c. They are backed by the U.S. government.
d. They have to be held until maturity.
e. All of these are true regarding STRIPS.
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74. ____ 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
75. The issuance of municipal securities is regulated by
a. the Securities and Exchange Commission.
b. the Consumer Financial Protection Bureau.
c. the respective state governments.
d. the Federal Reserve.
76. Jim purchases $10,000 par value bonds with a 10 percent coupon rate and a 7 percent yield to maturity. Jim will hold
the bonds until maturity. Thus, he will earn a return of ____ percent.
a. 8
b. 7
c. 10
d. More information is needed to answer this question.
77. A(n) __________ allows investors to exchange a bond for a stated number of shares of the firm’s _________.
a. equity-for-debt swap; common stock
b. debt-for-equity swap; preferred stock
c. call provision; common stock
d. convertible bond; common stock
78. Leveraged buyouts are commonly financed by the issuance of
a. money market securities.
b. Treasury bonds.
c. corporate bonds.
d. municipal bonds.
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Answer Key
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