Investment Analysis and Portfolio Management 9th Edition TestBank Chapter 17

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CHAPTER 17—BOND FUNDAMENTALS

TRUE/FALSE

Question: Public bonds differ from other debt because they are sold to the public rather

than to a single investor.

Answer:

Question: A nonrefunding provision prohibits a call and premature retirement of an issue

from the proceeds of a lower-coupon refunding bond.

Answer:

Question: In the case of a bond, the only contractual factor is the amount of interest

payments, since beginning and ending bond prices are determined by market forces.

Answer:

Question: In Germany, the government sector is the largest bond market segment.

Answer:

Question: Wealthy individual investors typically account for 90 to 95 percent of investors

in the bond market.

Answer:

Question: High-yield bonds are considered “investment” grade.

Answer:

Question: Government bond issues require an annual sinking fund payment of not less than

one percent of the outstanding issue.

Answer:

Question: Most U.S. municipal bonds are serial issues which are subject to state and local

taxes when they are issued in the investors home state.

Answer:

Question: The secondary bond market is significantly more active than the stock market.

Answer:

Question: High-yield bonds are considered “investment” grade.

Answer:

Question: A bonds price is determined by the issues coupon rate, length to maturity, and

the prevailing yield in the market.

Answer:

Question: Bonds can have different types of collateral and can be either secured, unsecured

or registered bonds.

Answer:

Question: A bonds maturity is affected by: call features, non-refunding provisions, and

sinking fund provisions.

Answer:

Question: Treasury Inflation Protected Securities (TIPS) ensures that investors will

received the promised yield in real terms by indexing bond principal and interest payments

to the stock market.

Answer:

Question: The coupon of a bond indicates the income that the bond investor will receive

over the life of the bond.

Answer:

Question: Bonds rated BB or above are considered to be investment grade bonds.

Answer:

Question: As of 2008, approximately 80% of all new municipal bond issues are insured.

Answer:

Question: The bond market segments that tend to be highly correlated and move together

include

Answer:

Question: Of the following provisions that might be found in a bond indenture, which

would tend to reduce the coupon interest rate?

Answer:

Question: The refunding provision of an indenture allows bonds to be retired unless

Answer:

Question: Serial bonds

Answer:

Question: Which of the following statements is not true regarding bond ratings?

Answer:

Question: When a fixed income security is being traded but the issuer is not meeting

interest payments it is trading

Answer:

Question: The corporate bond market in Japan

Answer:

Question: The bonds issued by the Bank of England are known as

Answer:

Question: When a bond issue is secured by a legal claim on equipment it is known as a

Answer:

Question: Which set of conditions will result in a bond with the greatest volatility?

Answer:

Question: The annual interest paid on a bond relative to its prevailing market price is

called its

Answer:

Question: The institutions which invest most heavily in corporate bond issues are

Answer:

Question: Which of the following is not a major rating agency for bonds?

Answer:

Question: Treasury bonds which can be purchased at a discount to be used at par to pay

estate taxes are called

Answer:

Question: The major owners of high-yield bonds have been

Answer:

Question: When a fixed income security is being traded at the price above its face value it

is trading

Answer:

Question: A security that has a coupon that is periodically adjusted is a

Answer:

Question: The following are participating issuers in bond markets

Answer:

Question: The following are participating investors in bond markets.

Answer:

Question: Institutional investors typically account for about

Answer:

Question: Alternative institutions favor different sectors of the bond market based on

Answer:

Question: Bond ratings are positively related to

Answer:

Question: Bond ratings are negatively related to

Answer:

Question: TIPS are U.S Treasury securities where the coupon rate is

Answer:

Question: If the yield to maturity for a par value TIPS bond with 8 years to maturity is 3%,

and the yield to maturity of a U.S Treasury note with 8 years is 4.25%, this implies that

Answer:

Question: The face value of a U.S. government agency security

Answer:

Question: A major source of risk faced by GNMA issues is

Answer:

Question: When homeowners pay off mortgages when they sell their homes, or when

homeowners refinance home mortgages, they effectively

Answer:

Question: General obligation bonds are

Answer:

Question: Revenue bonds are

Answer:

Question: Collateralized Mortgage obligations are

Answer:

Question: A bond denominated in U.S. dollars and sold in Japan to Japanese investors is

called a

Answer:

Question: The legal document setting forth the obligations of a bonds issuer is called

Answer:

Question: Collateralized mortgage obligations (CMOs) offset some of the problems

associated with traditional mortgage pass-throughs because

Answer:

Question: A bond that only pays a principal payment at maturity date is known as a:

Answer:

Question: What was developed in the early 1980s to offset some of the problems with

traditional mortgage pass-throughs.

Answer:

Question: Which of the following statements regarding Collateralized Debt Obligations

(CDOs) is false?

Answer:

Question: A U.S. dollar-denominated bond sold in the United States by a Japanese-firm is

called a(n):

Answer:

Question: Which of the following entities acquire mortgages and create mortgage backed

securities?

Answer:

Question: When a borrower pledges financial assets as collateral for a bond it is called a(n)

Answer:

Question: An 4.75 percent coupon bond issued by the State of Washington sells for $1,000.

What coupon rate on a corporate bond selling at $1,000 par value would produce the same

after tax return to the investor as the municipal bond if the investor is in the 28 percent

marginal tax bracket?

Answer:

Question: A 6.5 percent coupon bond issued by the State of California sells for $1,000.

What coupon rate on a corporate bond selling at $1,000 par value would produce the same

after tax return to the investor as the municipal bond if the investor is in the 26 percent

marginal tax bracket?

Answer:

Question: An 8.5 percent coupon bond issued by the State of Ohio sells for $1,000. What

coupon rate on a corporate bond selling at $1,000 par value would produce the same after

tax return to the investor as the municipal bond if the investor is in the 25 percent marginal

tax bracket?

Answer:

Question: A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000.

What coupon rate on a corporate bond selling at $1,000 par value would produce the same

after tax return to the investor as the municipal bond if the investor is in the 29 percent

marginal tax bracket?

Answer:

Question: At what point would an investor be indifferent between a Drifton corporate bond

yielding 12.5 percent and a tax-free municipal bond of equal financial strength if the

investors marginal tax rate is 25 percent?

Answer:

Question: At what point would an investor be indifferent between a Compco corporate

bond yielding 8.5 percent and a tax-free municipal bond of equal financial strength if the

investors marginal tax rate is 25 percent?

Answer:

Question: At what point would an investor be indifferent between a Trifton corporate bond

yielding 12.0 percent and a tax-free municipal bond of equal financial strength if the

investors marginal tax rate is 25 percent?

Answer:

Question: At what point would an investor be indifferent between a Bridgford corporate

bond yielding 8.0 percent and a tax-free municipal bond of equal financial strength if the

investors marginal tax rate is 25 percent?

Answer:

Question: You purchase a 10 3/8s 2001 Feb. $10,000 par Treasury Note at 103:11 and hold