1
PART I
LEARNING OBJECTIVES,
SUMMARY OVERVIEW,
AND PROBLEMS
3
CHAPTER 1
FIXEDfiINCOME SECURITIES:
DEFINING ELEMENTS
PROBLEMS
1. A 10-year bond was issued four years ago. e bond is denominated in US dollars, offers
a coupon rate of 10% with interest paid semi-annually, and is currently priced at 102% of
par. e bond’s:
A. tenor is six years.
B. nominal rate is 5%.
C. redemption value is 102% of the par value.
2. A sovereign bond has a maturity of 15 years. e bond is best described as a:
A. perpetual bond.
B. pure discount bond.
C. capital market security.
3. A company has issued a oating-rate note with a coupon rate equal to the three-month
Libor + 65 basis points. Interest payments are made quarterly on 31 March, 30 June,
30 September, and 31 December. On 31 March and 30 June, the three-month Libor
is 1.55% and 1.35%, respectively. e coupon rate for the interest payment made on
30 June is:
A. 2.00%.
B. 2.10%.
C. 2.20%.
4. e legal contract that describes the form of the bond, the obligations of the issuer, and
the rights of the bondholders can be best described as a bond’s:
A. covenant.
B. indenture.
C. debenture.
4 Part I: Learning Objectives, Summary Overview, and Problems
5. Which of the following is a type of external credit enhancement?
A. Covenants
B. A surety bond
C. Overcollaterization
6. An armative covenant is most likely to stipulate:
A. limits on the issuer’s leverage ratio.
B. how the proceeds of the bond issue will be used.
C. the maximum percentage of the issuer’s gross assets that can be sold.
7. Which of the following best describes a negative bond covenant? e issuer is:
A. required to pay taxes as they come due.
B. prohibited from investing in risky projects.
C. required to maintain its current lines of business.
8. A South African company issues bonds denominated in pound sterling that are sold to
investors in the United Kingdom. ese bonds can be best described as:
A. Eurobonds.
B. global bonds.
C. foreign bonds.
9. Relative to domestic and foreign bonds, Eurobonds are most likely to be:
A. bearer bonds.
B. registered bonds.
C. subject to greater regulation.
10. An investor in a country with an original issue discount tax provision purchases a 20-year
zero-coupon bond at a deep discount to par value. e investor plans to hold the bond
until the maturity date. e investor will most likely report:
A. a capital gain at maturity.
B. a tax deduction in the year the bond is purchased.
C. taxable income from the bond every year until maturity.
11. A bond that is characterized by a fixed periodic payment schedule that reduces the bond’s
outstanding principal amount to zero by the maturity date is best described as a:
A. bullet bond.
B. plain vanilla bond.
C. fully amortized bond.
12. If interest rates are expected to increase, the coupon payment structure most likely to ben-
efit the issuer is a:
A. step-up coupon.
B. ination-linked coupon.
C. cap in a oating-rate note.
13. Investors who believe that interest rates will rise most likely prefer to invest in:
A. inverse oaters.
B. fixed-rate bonds.
C. oating-rate notes.
14. A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is issued with
a coupon rate of 6% and a par value of 1,000. e bond pays interest semi-annually.
During the first six months after the bond’s issuance, the CPI increases by 2%. On the
first coupon payment date, the bond’s:
A. coupon rate increases to 8%.
B. coupon payment is equal to 40.
C. principal amount increases to 1,020.
Chapter 1 Fixed-Income Securities: Defining Elements 5
15. e provision that provides bondholders the right to sell the bond back to the issuer at a
predetermined price prior to the bond’s maturity date is referred to as:
A. a put provision.
B. a make-whole call provision.
C. an original issue discount provision.
16. Which of the following provisions is a benefit to the issuer?
A. Put provision
B. Call provision
C. Conversion provision
17. Relative to an otherwise similar option-free bond, a:
A. putable bond will trade at a higher price.
B. callable bond will trade at a higher price.
C. convertible bond will trade at a lower price.