Deck 13: The Debt Markets

Question 1

The major debt markets are

A)common stocks
B)preferred stocks
C)stocks and bonds
D)bonds and mortgages

Answer 1

D

Question 2

Who can issue a bond?

A)the U.S. Government or an agency thereof or foreign governments
B)state or local governments
C)domestic or foreign corporations
D)All of the above are correct.

Answer 2

D

Question 3

A fixed interest rate on the face of a bond is called

A)the coupon rate.
B)the federal funds rate.
C)the prime rate.
D)an interest rate spread.

Answer 3

A

Question 4

A ______ interest rate on a bond is called a coupon rate.

A)fixed
B)variable
C)prime
D)temporary

Question 5

The principal of a bond that is paid in full at maturity is

A)face value
B)par value
C)surplus value
D)Both a and b are correct.

Question 6

A coupon payment is equal to

A)the coupon rate divided by the face value.
B)one-half the coupon rate.
C)the coupon rate multiplied by the face value.
D)the coupon rate divided by the interest rate.

Question 7

Standard and Poor's and Moody's Investment Services evaluate bonds according to the issuer's

A)ability to pay back the principal and interest when due.
B)past history of debt redemption.
C)level of outstanding debt and amount of leveraging.
D)All of the above are correct.

Question 8

A high yield bond is

A)a junk bond.
B)safe and profitable.
C)risky but profitable if returns come in as anticipated.
D)Both a and c are correct.

Question 9

A written agreement setting forth the maturity date, interest rate, and other terms of the bond issue is called the

A)bond indenture.
B)subordinated debenture.
C)Load.
D)debenture bond.

Question 10

The ________________ is an expert in interpreting the provisions of an offering of new bonds for the investor.

A)underwriter
B)account executive
C)trustee
D)bond rater

Question 11

__________ are bonds with no collateral backing that have a general claim on the other unpledged assets of the issuer.

A)General obligation bonds
B)Debenture bonds
C)Common bonds
D)Collateral bonds

Question 12

Debenture bonds are bonds with no collateral backing that have a general claim on

A)the other unpledged assets of the issuer.
B)common stock.
C)preferred stock.
D)Cash.

Question 13

__________ are bonds which lack collateral backing and have a general claim on the issuer after debenture bondholders have been paid.

A)General obligation bonds
B)Revenue bonds
C)Debenture bonds
D)Subordinated debenture bonds

Question 14

Circumstances under which an issuer can buy back a bond before maturity at a specified price are

A)convertible provisions.
B)call provisions.
C)provisional bids.
D)bid-ask spreads.

Question 15

When an investor converts a bond to stock, he is invoking

A)a call provision.
B)a convertible provision.
C)a provisional provision.
D)a bid provision.

Question 16

When an investor converts a ___ to a ____, he is invoking a convertible provision.

A)bond, stock
B)stock, bond
C)bond, cash
D)bond, deposit

Question 17

Ceteris paribus, which of the following is true?

A)the greater the expected liquidity, the lower the yield
B)the greater the expected liquidity, the higher the yield
C)minimal liquidity means lower yield
D)lower expected liquidity does not affect yield

Question 18

Bonds that do not make coupon payments and are sold at a discount with the difference between the amount paid for the bond and the amount received at maturity equal to the interest are called

A)zero-coupon bonds.
B)Ginnie Mae bonds.
C)debenture bonds.
D)subordinated bonds.

Question 19

__________ are bonds whose principal amount is adjusted for inflation at the time when coupon payments are made. The coupon payment is based on the inflation-adjusted principal.

A)General obligation bonds
B)Revenue bonds
C)Inflation-indexed bonds
D)Subordinated debenture bonds

Question 20

A municipal bond is issued by state, county, and local governments to finance

A)roads
B)schools
C)transportation ventures
D)All of the above

Question 21

A municipal bond is issued by ___________ to finance roads, schools, and transportation ventures, etc.

A)state governments
B)county governments
C)local governments
D)All of the above are correct.

Question 22

__________ are bonds backed by financial assets.

A)General obligation bonds
B)Debenture bonds
C)Common bonds
D)Collateral bonds

Question 23

__________ are a type of government security that allows investors to register and trade ownership of the interest (coupon) payments and the principal amount of the security.

A)General obligation bonds
B)Revenue bonds
C)Treasury STRIPS
D)Subordinated debenture bonds

Question 24

__________ are a type of municipal bonds that are repaid out of general tax revenues.

A)General obligation bonds
B)Revenue bonds
C)Common bonds
D)Collateral bonds

Question 25

__________ are a type of municipal bonds that are repaid out of the revenues from a specific project that the bond supports.

A)General obligation bonds
B)Revenue bonds
C)Common bonds
D)Collateral bonds

Question 26

__________ are bonds backed by real personal property such as residential or commercial real estate.

A)General obligation bonds
B)Revenue bonds
C)Debenture bonds
D)Mortgage bonds

Question 27

Which of the following are types of municipal bonds?

A)General obligation bonds
B)Revenue bonds
C)Debenture bonds
D)Both a and b are correct.

Question 28

_____________________ are private enterprises that were publicly chartered by Congress to reduce the cost of borrowing to certain sectors of the economy such as farming, housing, and student loans.

A)Government-owned enterprises
B)Government-sponsored enterprises
C)Federal Housing Administrations
D)Collaterized Mortgage Organizations

Question 29

__________ are debt securities that are backed by a pool of standardized mortgages, have a low default risk, and provide a steady stream of income to the investor.

A)General obligation bonds
B)Mortgage-backed securities
C)Mortgage bonds
D)Collateral bonds

Question 30

Government Sponsored Enterprises (GSEs)

A)are privately owned.
B)issue long-term securities.
C)issue securities that are not implicitly or explicitly guaranteed by the federal government.
D)All of the above are correct
E)Both a and b are correct.

Question 31

Government sponsored enterprises (GSEs)

A)are not privately owned.
B)do not issue long-term securities.
C)are not guaranteed by the Federal Government.
D)None of the above is correct.
E)Both a and b are correct.

Question 32

The yield spread between Treasury securities and government agency securities is due to the fact that

A)the agencies may go bankrupt.
B)agency securities are not as liquid as Treasuries.
C)secondary markets for agency securities have greater depth and breadth than primary markets for Treasuries.
D)Both a and c are correct.

Question 33

Which of the following types of securities are not backed by any real or financial assets?

A)collateral bonds
B)mortgage bonds
C)debenture bonds
D)mortgage-backed securities

Question 34

An investor seeking the highest possible return and who is willing to live with a great deal of risk would be best served by which of the following types of mutual funds?

A)high Yield Bond Funds
B)balanced Funds
C)U.S. Government Income Funds
D)Ginnie Mae Funds

Question 35

Other factors equal, which of the following types of debt instruments is likely to pay the highest return?

A)debenture bonds
B)subordinated debenture bonds
C)mortgage bonds
D)collateral bonds

Question 36

Which of the debt instruments below is likely to pay the highest return?

A)debenture bonds
B)mortgage-backed securities
C)mortgage bonds
D)collateral bonds

Question 37

A bond's coupon yield will be equal to its current yield

A)whenever the bond is selling above its par value.
B)whenever the bond is selling below its par value.
C)whenever the bond is selling at its par value.
D)always.

Question 38

Assume that a particular Treasury security pays a coupon rate of 9 percent. The yield to maturity on the bond is 5.75 percent. From this information we know that

A)the bond is selling at a discount.
B)the yield to maturity exceeds the coupon rate.
C)interest rates have risen since the bond was issued.
D)the bond is selling at a premium.

Question 39

Assume that a particular Treasury security pays a coupon rate of 5.75 percent. The yield to maturity on the bond is 9.0 percent. From this information we know that

A)the bond is selling at a discount.
B)the yield to maturity exceeds the coupon rate.
C)interest rates have risen since the bond was issued.
D)the bond is selling at a premium.

Question 40

Which of the following statements best describes the relationship between stocks and bonds with respect to risk and return?

A)Although bonds are riskier than stocks, bonds have historically earned a higher rate of return.
B)Even though there is a higher expected rate of return with bond ownership relative to stock ownership, there is no guarantee that a higher return will be realized by any given instrument or investor.
C)Although stocks are riskier than bonds, bonds have historically earned a higher rate of return.
D)Other things equal, ownership of stocks involves greater risk and greater expected return than ownership of bonds or other financial assets.

Question 41

If a city wants to raise funds to build a new baseball stadium and pay off the debt with revenues raised through ticket and concession sales, which of the following types of securities should it consider using?

A)revenue bonds
B)general obligation bonds
C)inflation-indexed bonds
D)Treasury STRIPS

Question 42

If a city wants to raise funds to build a new city hall and pay off the debt with revenues raised from sales taxes, which of the following types of securities should it consider using?

A)revenue bonds
B)general obligation bonds
C)inflation-indexed bonds
D)Treasury STRIPS

Question 43

Which of the following statements best describes the relationship among Treasury bills, notes, and bonds?

A)Bills have an original maturity of one year or less. Notes have an original maturity of 2 to 10 years and bonds have an original maturity of greater than 10 years.
B)Notes have an original maturity of one year or less. Bills have an original maturity of 2 to 10 years and bonds have an original maturity of greater than 10 years.
C)Bonds have an original maturity of one year or less. Notes have an original maturity of 2 to 10 years and bills have an original maturity of greater than 10 years.
D)Bills have an original maturity of one year or less. Bonds have an original maturity of 2 to 10 years and notes have an original maturity of greater than 10 years.

Question 44

Why have Ginnie Mae mortgage-backed securities become so popular with investors?

A)Because they have low interest rate risk.
B)Because they provide needed liquidity to the home mortgage market.
C)Because of the very low default risk created by the GNMA guarantee and the steady stream of income provided.
D)Because of the high nominal returns compared to other debt securities.

Question 45

If a bond sells for $1,050 and pays $75 in interest annually, what is its current yield?

A)14 percent
B)7.5 percent
C)7.14 percent
D)The current yield cannot be found without knowing the original purchase price.

Question 46

If a bond pays $75 in interest annually, at what price would it have to sell to have a current yield of 7 percent?

A)$1,000.00
B)$1,071.43
C)$935.00
D)The current yield cannot be found without knowing purchase price.

Question 47

The par value of a bond is $1,000, the coupon rate is 6 percent, and the current interest rate is 7 percent. What is the coupon payment?

A)$70
B)$60
C)$100
D)$65

Question 48

Major credit-rating agencies that analyze and evaluate bonds and assign them to one of nine classes based on the probability of default are

A)Standard & Poors and Moody's Investors Services
B)Fannie Mae
C)Freddie Mac
D)Ginnie Mae Investors Services

Question 49

Which of the following is false?

A)U.S. government bonds are issued by the Bureau of the Public Debt and sold in regularly scheduled competitive auctions.
B)Treasury bonds are a full faith and credit obligation of the U.S. government and are free from interest rate and default risk.
C)The secondary market in Treasury bonds is an over-the-counter market formed by a group of government securities dealers.
D)Interest earned on Treasury bonds is exempt from state income taxes.

Question 50

Which of the following is a risk of investing in mortgages?

A)default risk
B)prepayment risk
C)interest rate risk
D)All of the above are correct.

Question 51

Mortgage loans made by financial institutions or mortgage brokers without federal insurance are called

A)fixed rate mortgages.
B)uninsured mortgages.
C)secondary mortgages.
D)conventional mortgages.

Question 52

To hedge the risk that mortgages will be prepaid before they mature because the property is sold or refinanced, an investor should purchase

A)mortgage-backed securities.
B)collateralized mortgage obligations.
C)FHA insured mortgages.
D)VA insured mortgages.

Question 53

_______________________ are bonds issued by private enterprises that were publicly chartered by Congress to reduce the cost of borrowing to certain sectors of the economy such as farming, housing, and student loans.

A)General obligation bonds
B)Government agencies securities
C)Revenue bonds
D)Treasury STRIPS

Question 54

_________________ is the paying off of the principal of a loan over the life of the loan.

A)Prepayment
B)Collaterization
C)Amortization
D)Securitization

Question 55

The advantage to owning zero-coupon bonds is that

A)there is no risk that the interest over the life of the bond will have to be reinvested at a lower rate.
B)they are insured by the federal government and hence default risk is zero.
C)their coupon payments are made annually instead of semi-annually.
D)interest payments are not taxed on the amount of the interest earned each year.

Question 56

A seasoned bond is

A)a "used" bond that sells in the secondary market.
B)a new bond that is sold by a corporation that has previously issued bonds.
C)traded on the New York Stock Exchange.
D)backed by both real and financial assets.

Question 57

An inflation-index bond is one where the

A)coupon rate is adjusted every six months for changes in inflation.
B)interest payments every six months are adjusted for inflation based on the inflation-adjusted coupon rate.
C)principal amount is adjusted for inflation at the time when a coupon payment is made, usually every six months and the inflation adjusted principal is repaid at maturity.
D)None of the above is correct.

Question 58

If the rate on a comparable corporate bonds is 8 percent, and the average marginal tax rate is 25 percent, in equilibrium, the rate on municipal bonds would be

A)2 percent.
B)4 percent.
C)10 percent.
D)6 percent.

Question 59

Which of the following is false?

A)Payments of principal and interest of securities of government-sponsored enterprises are guaranteed by the federal government.
B)Areas where government-sponsored enterprises have been established include housing, farming, and student loans.
C)Government-sponsored enterprises are privately owned and issue long-term securities.
D)Government-sponsored enterprises have experienced tremendous growth since the 1990s.

Question 60

A ______________ is a long-term debt instrument for which real estate is used as collateral to secure the loan in the event of a default by the borrower.

A)collateral bond
B)mortgage
C)government agency security
D)debenture bond

Question 61

Which of the following risk pertains to mortgages more than to other long term financial instruments?

A)default risk
B)interest rate risk
C)prepayment risk
D)liquidity risk

Question 62

The ________________ is much less for variable rate mortgages than for fixed rate mortgages.

A)default risk
B)interest rate risk
C)prepayment risk
D)Both b and c are correct.

Question 63

_______________________________ redirect the principal and interest payments of mortgage-backed securities to various classes of bondholders, thereby creating financial instruments with varying prepayment risks.

A)Securitizations
B)Collateralized mortgage obligations
C)VA and FHA insured mortgages
D)Secondary markets

Question 64

The _______________________ leveraged the firm, the _________________ the default risk, other factors equal.

A)more highly; less
B)more highly; greater
C)less highly; greater
D)less; greater

Question 65

Which of the following affects the discount factor for mortgages but not the discount factor for bonds?

A)any factor that affects servicing costs such as changes in technology
B)any factor that affects the risk-free turn
C)any factor that affects the risk-premium
D)the stance of monetary policy and changes in inflationary expectations

Question 66

Which of the following is false?

A)The issuer of municipal bonds is able to borrow at a lower rate than if taxes would have to be paid on the interest earned by the buyer.
B)The interest on municipal securities is always exempt from all federal taxes and state taxes.
C)Municipal bonds are issued by state, county, and local governments to finance public projects such as schools, utilities, roads, and transportation projects.
D)Municipal bonds are particularly attractive to taxpayers in high income tax brackets.

Question 67

Assume that you are tracking one of your corporate bond holdings on the financial pages of The Wall Street Journal. You notice in the far right-hand column that your company's bond had a "net change" of -1/8 for the day. What does this mean?

A)The interest rate on the bond has fallen by .125 percentage points.
B)The price of the bond has fallen $1.25 since the previous trading day.
C)The price of the bond has fallen by 1.25 percent since the previous trading day.
D)None of the above is correct.

Question 68

Which of the following is true?

A)The remaining monthly payments and the current discount factor determine the present value of a mortgage and hence the price at which the mortgage will trade.
B)The risk-free return is composed of the return on a Treasury security of comparable maturity.
C)If the value of mortgages falls-say because of increasing interest rates-the asset side of bank balance sheets falls. However, the liabilities of a bank (i.e., deposits) do not fall. This may result in a bank's (or the banking system's) liabilities becoming greater than its assets.
D)All of the above are true.

Question 69

The risk premium for bonds is based on all of the following except

A)the risk-free return.
B)the level of economic activity.
C)the capital structure of the firm.
D)firm and industry specific conditions.

Question 70

In finding the price of a previously issued bond, the appropriate _______________ is the current interest rate on a security of equal risk, liquidity, and maturity.

A)yield
B)discount factor
C)price
D)coupon payment

Question 71

Which of the following is false?

A)Conventional loans never have mortgage insurance.
B)Conventional loans are made by financial institutions and mortgage brokers without federal insurance.
C)The interest rate on variable rate mortgages is adjusted as market rates change.
D)The principal of a mortgage is generally amortized over the life of the loan.

Question 72

_________________ is where the repayment of the principal on a mortgage is generally spread out over the life of the loan.

A)Amortization
B)Collateralization
C)Securitization
D)Indexation

Question 73

The _________________ is the risk that mortgages will be paid off early and the funds will have to be reinvested at a lower return.

A)default risk
B)interest rate risk
C)liquidity risk
D)prepayment risk

Question 74

Which of the following is false?

A)The longer the term-to-maturity on a mortgage, the smaller the default risk.
B)If interest rates rise, the default risk on variable rate loans increases.
C)The lower the down payment, the greater the default risk.
D)Variable rate loans reduce the interest rate risk.

Question 75

Which of the following is true?

A)Mortgages are assets to the holder and liabilities to the borrower.
B)Lenders are exposed to an interest rate risk when they invest in fixed rate mortgages.
C)Variable-rate mortgages reduce the interest rate risk of holding long-term mortgages.
D)All of the above.

Question 76

Which of the following is false?

A)There have been some defaults on general obligation municipal bonds.
B)General obligation bonds are repaid out of general tax revenues.
C)Revenue bonds are paid back out of the cash flows of a particular project.
D)There have been some defaults on revenue bonds.

Question 77

If the rate on a comparable corporate bond is 8 percent, and, in equilibrium, the rate on municipal bonds is 6 percent, what is the average marginal tax rate?

A)25 percent.
B)14 percent.
C)10 percent.
D)2 percent.

Question 78

Which of the following is false?

A)The fed funds target rate was reduced dramatically from mid 2007 through December 2008 due to an economy in crisis.
B)In early 2009, the Fed did not anticipate increasing rates anytime soon.
C)In late 2008, the market for mortgage-backed securities dried up in response to the mortgage crisis.
D)The Fed has acted too slowly in mitigating the financial crisis of 2007-2008.

Question 79

Which of the following is false?

A)Prior to the Great Depression, mortgages were balloon mortgages where only interest payments were made.
B)Subprime mortgages are made to borrowers with poor credit scores, little or no down payment, and often at introductory rates that reset higher in two or three years.
C)Fannie Mae and Freddie Mac were put into conservatorship in mid 2008.
D)Today, savings associations originate and hold about 80 percent of all mortgages.

Question 80

The annualized discount factor that is used to determine the price of a mortgage in the secondary markets includes

A)the risk free return.
B)a risk premium.
C)a premium for the servicing costs of the mortgage..
D)All of the above are correct.