Chapter 12 – Bond Fundamentals and Valuation
1. Public bonds differ from other debt because they are sold to the public rather than to a single investor.
a.
True
b.
False
2. The market for short-term issues with maturities of one year or less is commonly known as the money market.
a.
True
b.
False
3. Instruments for intermediate-term issues with maturities in excess of one year but less than 10 years are known as
notes.
a.
True
b.
False
4. The coupon of a bond indicates the income that the bond investor will receive over the life of the bond.
a.
True
Chapter 12 – Bond Fundamentals and Valuation
b.
False
5. A bond’s maturity is affected by call features, non-refunding provisions, and sinking fund provisions.
a.
True
b.
False
6. A nonrefunding provision prohibits a call and premature retirement of an issue from the proceeds of a lower-coupon
refunding bond.
a.
True
b.
False
7. In the case of a bond, the only contractual factor is the amount of interest payments, as beginning and ending bond
prices are determined by market forces.
a.
True
b.
False
Chapter 12 – Bond Fundamentals and Valuation
8. Bonds can have different types of collateral and can be secured, unsecured, or registered bonds.
a.
True
b.
False
9. In most countries, sovereign bond issues are the smallest bond market segment.
a.
True
b.
False
10. High-yield bonds are considered “investment” grade.
a.
True
b.
False
11. Bonds rated BB or above are considered to be investment-grade bonds.
a.
True
b.
False
12. Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds in which the bond principal and interest
payments are indexed to the consumer price index.
a.
True
b.
False
13. Treasury Inflation Protected Securities (TIPS) ensures that investors will receive the promised yield in real terms by
indexing bond principal and interest payments to the stock market.
a.
True
b.
False
14. Most U.S. municipal bonds are serial issues that are subject to state and local taxes when they are issued in the
investor’s home state.
a.
True
b.
False
15. Revenue bonds are essentially backed by the full faith and credit of the issuer and its entire taxing power.
a.
True
b.
False
16. General obligation bonds (GOs) are serviced by the income generated from specific revenue-producing projects of the
municipality.
a.
True
b.
False
17. Samurai bonds are yen-denominated bonds sold in markets outside Japan by international syndicates.
a.
True
b.
False
18. The major problem facing a bond analyst is the ability to forecast the basic interest rate level because yield spreads are
generally inconsequential.
a.
True
b.
False
19. Yield to maturity and current yield are equal when the bond is selling for exactly par value.
a.
True
b.
False
20. The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity
differential hypothesis, and the segmented quality hypothesis.
a.
True
b.
False
21. The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.
a.
True
b.
False
22. According to the expectations hypothesis, a rising yield curve indicates that investors’ demand for long maturity bonds
is expected to rise.
a.
True
b.
False
23. The fundamental determinants of interest rates are the real risk-free rate, inflation, and the risk premium.
a.
True
b.
False
24. According to the segmented market hypothesis, yields for a particular maturity segment depend on supply and demand
within the maturity segment.
a.
True
b.
False
25. The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of
bonds.
a.
True
b.
False
26. There is a direct relationship between coupon and price.
a.
True
b.
False
27. A bond’s price is determined by the issue’s coupon rate, length to maturity, and the prevailing yield in the market.
a.
True
b.
False
28. The yield to maturity is normally equal to the coupon rate.
a.
True
b.
False
29. For a bond, the present value model incorporates both the coupon receipts and the capital gain or loss.
Chapter 12 – Bond Fundamentals and Valuation
a.
True
b.
False
30. The internal rate of return is that discount rate that sets the present value of cash flows from an investment equal to its
par value.
a.
True
b.
False
31. If an investor buys a high coupon bond, and rates then fall, the investor has “locked up” that high yield as a realized
yield.
a.
True
b.
False
32. The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.
a.
True
Chapter 12 – Bond Fundamentals and Valuation
b.
False
33. The annual interest paid on a bond relative to its prevailing market price is called its ____.
a.
b.
c.
d.
e.
34. Of the following provisions that may be found in a bond indenture, which would tend to reduce the coupon interest
rate?
a.
a call provision
b.
no restrictive covenants
c.
a sinking fund provision
d.
change in bond rating from Aaa to Aa
e.
an indenture provision
35. The refunding provision of an indenture allows bonds to be retired EXCEPT if
a.
they are replaced with a lower coupon bond issue.
b.
the remaining time to maturity is less than five years.
c.
the remaining time to maturity is greater than five years.
d.
the stated time period in the indenture has not passed.
e.
the stated time period in the indenture has passed.
36. When a bond issue is secured by a legal claim on equipment it is known as a(n)
a.
junior bond.
b.
income bond.
c.
bearer bond.
d.
trust certificate.
e.
perpetuity.
37. The legal document setting forth the obligations of a bond’s issuer is called a
a.
debenture.
b.
warrant.
c.
indenture.
d.
rights certificate.
e.
trustee deed.
38. Issues that provide funds to retire another issue early are known as
a.
bearer bonds.
b.
secured debentures.
c.
unsecured debentures.
d.
revenue bonds.
e.
refunding bonds.
39. Which bond provision would be considered the riskiest for an investor who is concerned that market interest rates will
drop dramatically over the life of the bond?
a.
sinking fund
b.
deferred call
c.
freely callable
d.
non-callable
e.
None of these are correct.
40. Which of the following statements is not true regarding bond ratings?
a.
The ratings assigned are meant to indicate the probability of default for the bond issuer.
b.
The bonds assigned one of the top four rating classes are considered investment grade bonds.
c.
Once a rating is assigned to an issue it cannot be changed for the first two years after which it is reviewed on a
regular basis.
d.
Bonds rated BB and below are referred to as high yield or “junk” bonds.
e.
The rating agencies modify the ratings with + and − signs or numbers after the letters.
41. Junk bonds are high yield bond bonds rated below
a.
BBB.
b.
BB.
c.
B.
d.
CCC.
e.
CC.
42. The institutions that invest most heavily in corporate bond issues are
a.
life insurance companies and commercial banks.
b.
life insurance companies and property and liability insurance companies.
c.
life insurance companies and pension funds.
d.
commercial banks and property and liability insurance companies.
e.
commercial banks and pension funds.
43. Which of the following is NOT a major rating agency for bonds?
a.
Moody’s
b.
Standard & Poor’s
c.
Fitch Investor Services
d.
Value Line
e.
Duff and Phelps
44. Institutional investors typically account for about
a.
90 to 95 percent of bond market trading.
b.
40 to 50 percent of bond market trading.
c.
10 to 15 percent of bond market trading.
d.
less than 5 percent of bond market trading.
e.
less than 1 percent of bond market trading.
45. Bond ratings are positively related to
a.
leverage.
b.
size.
c.
type of business.
Chapter 12 – Bond Fundamentals and Valuation
d.
bond maturity.
e.
coupon rate.
46. Bond ratings are negatively related to
a.
profitability.
b.
cash flow coverage.
c.
earnings instability.
d.
bond maturity.
e.
coupon rate.
47. Which factors indicate that in-depth credit analysis of high-yield bonds is important?
a.
the large number of high-yield issues
b.
the overall decline in quality of these bonds
c.
the wide range of quality among these bonds
d.
the growing complexity of these bonds
e.
All of these are correct.
48. Which type of bond is backed by the full faith and credit of the issuer and its entire taxing power?
a.
Fannie Mae
b.
Freddie Mac
c.
GSEs
d.
general obligation bonds
e.
revenue bonds
49. The bonds issued by the Bank of England are known as
a.
gilts.
b.
bunds.
c.
limies.
d.
treasuries.
e.
benchmarks.
50. When a fixed income security is being traded at the price above its face value it is trading
a.
at a discount.
b.
at par.
c.
at a premium.
d.
flat.
e.
no accrual.
Chapter 12 – Bond Fundamentals and Valuation
51. Which type of bond market is the largest sector in both Japan and the United States?
a.
corporate
b.
high yield/emerging market
c.
securitized/collateralized
d.
sovereign
e.
quasi & foreign governments
52. A security that has a coupon that is periodically adjusted is a(n)
a.
variable note.
b.
variation note.
c.
adjustable coupon note.
d.
money market certificate.
e.
deep discount bond.
53. TIPS are U.S Treasury securities where the coupon rate is
a.
zero.
b.
indexed to the rate of inflation.
c.
indexed to the discount rate.
d.
indexed to the prime rate.
e.
indexed to the stock market.
54. If the yield to maturity for a par value TIPS bond with eight years to maturity is 3 percent, and the yield to maturity of
a U.S Treasury note with 8 years is 4.25 percent, this implies that
a.
the expected annual rate of inflation over the next eight years is −1.25 percent.
b.
the expected annual rate of inflation over the next eight years is 1.25 percent.
c.
the expected annual rate of inflation over the next eight years is −2.25 percent.
d.
the expected annual rate of inflation over the next eight years is 2.25 percent.
e.
the expected annual rate of inflation over the next eight years is 0 percent.
55. When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages,
they effectively
a.
make the maturities of GNMA securities longer.
b.
make the maturities of GNMA securities shorter.
c.
make the maturities of U.S. Treasury securities longer.
Chapter 12 – Bond Fundamentals and Valuation
d.
make the maturities of U.S. Treasury securities shorter.
e.
default on their mortgages.
56. General obligation bonds are
a.
U.S. Treasury bonds backed by the full faith and credit of the issuer.
b.
U.S. Treasury bonds backed by income generated form specific projects.
c.
municipal bonds backed by the full faith and credit of the issuer.
d.
municipal bonds backed by income generated from specific projects.
e.
a type of U.S. agency security.
57. Revenue bonds are
a.
U.S. Treasury bonds backed by the full faith and credit of the issuer.
b.
U.S. Treasury bonds backed by income generated form specific projects.
c.
municipal bonds backed by the full faith and credit of the issuer.
d.
municipal bonds backed by income generated from specific projects.
e.
a type of U.S. agency security.