Deck 14: Investing in Bonds and Other Alternatives

Question 1

The par value of the bond is the rate at which payments will be made to the bondholder annually, in the form of interest.

Answer 1

False

Question 2

You hold in your hands a legal document that provides the specific terms of the loan agreement, including a description of the bond, as well as the rights of the bondholder. You have a(n) ________.

A) agency contract
B) bond signatory
C) signatory contract
D) indenture
E) debenture

Answer 2

indenture

Question 3

Bonds enjoy all but one of the following advantages. Which is it?

A) When interest rates drop, bond prices rise.
B) Bonds may be called when interest rates drop.
C) They reduce risk through diversification.
D) Bonds produce steady income.
E) They can be a safe investment if held to maturity.

Answer 3

Bonds may be called when interest rates drop.

Question 4

The issuer of the bond is effectively loaning money to the bondholder when the bond is purchased.

Question 5

If you are already retired and seek additional income, then bonds as an investment choice would be wise.

Question 6

Why might you consider investing in bonds?

A) Bonds reduce risk through diversification.
B) Bonds produce steady income.
C) Bonds can be safe investment if held to maturity.
D) all of the above

Question 7

Any bond that is backed by the pledge of collateral is known as what type of bond?

A) collateralized
B) secured
C) recalled
D) sinking
E) agency

Question 8

Bonds which are very low rated, yet high yielding bonds are known as junk bonds.

Question 9

Which of the following determines what the annual interest payment on a bond will be?

A) the par value of the bond
B) the maturity date of the bond
C) the coupon rate of the bond
D) all of the above are correct
E) only A and C are correct

Question 10

Bonds reduce risk through diversification.

Question 11

The face value of a bond, or the amount that is returned to the bondholder at maturity is also known as the bond's denomination.

Question 12

What could happen if you sell a bond before its maturity date?

A) You could have a capital gain.
B) You could have a capital loss.
C) You could break even with the price you paid for the bond.
D) All of the above are correct.
E) Only A and C are correct.

Question 13

Bonds that do not pay interest are known as no-load bonds.

Question 14

The ________ is the face value of a bond, and the amount that is returned to the bondholder at maturity.

A) return price
B) par value
C) dead price
D) market price
E) none of the above

Question 15

State or municipal bonds that have interest and par value paid for with funds from a designated project or specific tax are known as ________ bonds.

A) Series EE
B) life cycle
C) revenue
D) general obligation
E) none of the above

Question 16

An unsecured long-term bond is known as a(n) ________.

A) bondenture
B) indenture
C) debenture
D) abdenture

Question 17

Herman Melville never thought of a bond as being a ________ and that he would be a ________ when securing one until he read about it in his personal finance text.

A) lien; borrower
B) loan; borrower
C) loan; lender
D) lien; debenture
E) lien; lender

Question 18

Bond issuers may do something very important for the bondholder that increases the probability the debt will be successfully paid off at maturity. The issuer

A) establishes a sinking fund.
B) sets a fixed interest rate.
C) has the bond indentured.
D) has the bond deferred.

Question 19

What is the purpose of the sinking fund?

A) To force the issuing company to save money to retire the bonds at maturity.
B) To raise outside capital to sink back into the company.
C) To cause the coupon rate to increase.
D) None of the above is correct.

Question 20

XYZ company issued bonds three years ago with a 7% coupon rate. Today, the market rate of interest was lowered to 4%. What most likely will happen next?

A) XYZ company will lower the par value of their bonds.
B) XYZ company will raise the coupon rate of their bonds.
C) XYZ company will call their bonds in.
D) None of the above is correct.

Question 21

The long-term bond you own was issued by IBM Corporation and used no collateral. This is an example of a(n) ________.

A) unsecured mortgage
B) credit
C) debenture
D) nomenclature
E) none of the above

Question 22

A secured bond is one that is backed by collateral.

Question 23

An I bond is an accrual-type bond, meaning that interest is added to the value of the bond and paid when the bond is cashed in.

Question 24

Peter must read the ________, or legal agreement between the firm issuing the bond and the bond trustee who represents the bondholders.

A) contract
B) indenture
C) provisions
D) debenture
E) prospectus

Question 25

An indenture is an unsecured long-term bond.

Question 26

Your friend wants you to seriously consider investing in bonds like she did. Why?

Question 27

If the school district wants to build a new high school, they can sell municipal bonds.

Question 28

Most corporate bonds are tax-free bonds in the state the corporation is based in.

Question 29

What is the purpose of the call provision on some bonds?

Question 30

TIPS are treasury bonds for which the par value changes with the consumer price index.

Question 31

Randall has $25,000 and is considering investing in bonds. With this amount of start up money he should look into which of the following bonds?

A) Series EE savings bond
B) agency bonds
C) corporate bonds
D) pass-through certificates
E) both B and D would be good choices.

Question 32

If you were considering the purchase of a bond issued by a state, county, or city you would be considering the purchase of a ________ bond.

A) state
B) municipal
C) government hedge
D) corporate
E) none of the above

Question 33

The biggest single payer in the bond market is the U.S. Government

Question 34

Interest payments on municipal bonds are exempt from federal taxes and state taxes as long as you live in the state in which the bonds were issued.

Question 35

Governments issue savings bonds such as the Series EE bonds in an attempt to meet the investing needs of the small investor.

Question 36

You own a(n) ________ certificate, which is a certificate that represents a portion of ownership in a pool of federally insured mortgages.

A) interest
B) mortgage bond
C) collateral
D) pass-through
E) none of the above

Question 37

The largest single player and payer in the bond market ________.

A) is corporate America
B) are municipal bond issuers
C) is the U.S. government
D) are foreign firms
E) are schools and county governments

Question 38

The bond that you own does not pay any interest. Instead, it is sold at a "discount" from its maturity value. This is a ________ bond.

A) no interest
B) face discount
C) growth
D) zero coupon
E) none of the above

Question 39

A debenture is a long-term bond secured by collateral.

Question 40

Provide an explanation of the basic bond terminology and features.

Question 41

Why are the tax implications of investing in bonds more involved than the tax implications of investing in common stock?

Question 42

Investors require a higher rate of return on bonds with higher bond ratings.

Question 43

A bond's yield is always exactly the same as its coupon interest rate.

Question 44

Because there is no default or call risk associated with government bonds, they generally pay ________ rate of interest than other bonds.

A) a higher
B) a lower
C) the same
D) none of the above

Question 45

The current yield, the coupon rate, and the yield to maturity are equal if the bond sells at par value.

Question 46

Treasury bonds are generally viewed as being risk-free, given the government's ability to ________ and ________.

A) tax people; do volume business
B) tax corporations; do volume business
C) tax; print more money
D) print money; do volume business
E) none of the above

Question 47

The advantages of Treasury bonds include

A) there is no default.
B) they can't be called in.
C) most interest is free of state and local taxes.
D) All of the above
E) Only A and C

Question 48

When there are changes in the consumer price index, there is a corresponding change in the par value of ________.

A) TIPS
B) Series EE bonds
C) I Bonds
D) Munis

Question 49

Because junk bonds carry a much higher risk of default, they also carry an interest rate ________ percent above the AAA grade long-term bonds.

A) 1 ‑2
B) 3 ‑6
C) 7 ‑9
D) 10 ‑12
E) 20 ‑25

Question 50

In the event that a corporation files for bankruptcy, bond trustees have the power to ________.

A) issue new bonds
B) recall outstanding bonds
C) sell the corporations secured assets and use the proceeds to pay the bondholders
D) change the interest rate on outstanding bonds

Question 51

One of the problems with most bonds is that their coupon payment is fixed and rising inflation weakens the purchasing power of their coupon payments. Which of the following bonds is the best option during times of high inflation?

A) FNMA Agency bonds
B) TIPS
C) High grade corporate bonds
D) High yield speculative bonds

Question 52

Which of the following bonds would be appropriate for a retired person seeking a stream of income during retirement?

A) U.S. Treasury
B) Investment grade corporate bond
C) Municipal bond
D) All of the above are correct.

Question 53

The yield to maturity for a bond with eight years to maturity, with a face value of $1,000, pays ten percent annual coupon and currently sells for $1,950, is five percent.

Question 54

The corporate bond that you own is backed by the corporation's Houston, Texas real estate holdings. If the company defaults, these holdings could be liquidated to repay the debt. This is an example of a ________ bond.

A) mortgage
B) debenture
C) liquidation
D) credit
E) none of the above

Question 55

Brittany has learned in her research that ________ are issued by the FNMA and the FHLB.

A) pass-through certificates
B) agency bonds
C) treasury bonds
D) treasury inflation-indexed bonds

Question 56

When a(n) ________ savings bond is purchased, its price is one-half its face value, with face values ranging from $50 to $10,000.

A) paper Series EE
B) electronic Series EE
C) I
D) All of the above
E) Only A and B

Question 57

The interest rate carried on agency bonds, such as FNMA and FHLB, is ________ the interest rate on Treasury bonds.

A) higher than
B) lower than
C) usually the same as
D) at most half that of
E) none of the above

Question 58

Outline, with a brief description, the different types of bonds.

Question 59

The city of Houston passed a bond issue to build a bridge over the bay. The bond was to have the interest paid by the income generated by charging drivers a toll to cross the bridge. This is an example of a ________ bond.

A) collateralized
B) cash
C) revenue
D) general obligation
E) none of the above

Question 60

Which of the following starts off with the highest risk bond and ends with the lowest risk bond?

A) Municipal, Corporate, Treasury, Junk
B) Corporate, Junk, Treasury, Municipal
C) Junk, Corporate, Municipal, Treasury
D) Corporate, Junk, Municipal, Treasury

Question 61

What is the value of a $1,000 par value bond with a 12% annual coupon that will mature in 5 years if the bond is currently priced to yield 10%?

A) $955.76
B) $1,000.00
C) $1,075.82
D) $1,158.52

Question 62

In comparing municipal bonds to other taxable bonds, the comparison must be between equivalent taxable yields.

Question 63

A bond has a par value of $1,000, a market price of $300, and a 9% coupon rate. It will mature in 5 years. What is the current yield of the bond?

A) 18.89%
B) 19.00%
C) 21.75%
D) 48.27%
E) 44.96%

Question 64

When a bond is bought at a discount price below its par value, the current yield will be higher than the coupon rate.

Question 65

Karyn wants to evaluate some bonds she is contemplating buying. In order to adequately evaluate them, she should check the bond yields, read the bond quotes in a paper, and check the ________.

A) par values
B) bond ratings
C) company rating
D) company's performance

Question 66

Suppose you just purchased a corporate bond with a par value of $1,000 for $951.25. It carries a 7% coupon rate and will mature in 5 years. What is the yield to maturity?

A) 6.14%
B) 7%
C) 8.23%
D) 12%

Question 67

Using a financial calculator calculate the value of a bond that matures in 20 years with a coupon interest rate of 10%, which is the required rate of return, and a par value of $1,000.

A) $100
B) $1,000
C) $1,100
D) $10,000

Question 68

A bond's coupon interest rate is a factor if its market price.

Question 69

A bond rating is really a measure of a bond's ________.

A) performance
B) yield
C) market value
D) riskiness
E) yield to maturity

Question 70

Coupon interest is usually paid in quarterly installments.

Question 71

Suppose that you just purchased a $1,000 Treasury Inflation-Indexed Bond which carried an original interest rate of 3.375%. The consumer price index just increased by 5% increasing the par value of the bond to $1,050. What is your interest payment considering this change?

A) $31.75
B) $33.75
C) $35.44
D) $50.00
E) $52.50

Question 72

Suppose that you have a bond that has a par value of $1,000 and a coupon interest rate of 9%. Its current price is $950 and it will mature in 7 years. What is the yield to maturity?

A) 8.45%
B) 9.00%
C) 10.03%
D) 10.23%

Question 73

Sherman has three bonds with a $1,000 par value that pay a 9% coupon interest rate. How much will he earn every six months?

A) $27
B) $90
C) $135
D) $202.50
E) $270

Question 74

Gail used her financial calculator to calculate her bond's yield to maturity. Given the following information what was her yield? N = 10; PV = -880.00; PMT = 100; FV = 1000.

A) 10.0%
B) 8.80%
C) 10.18%
D) 12.14%
E) none of the above

Question 75

There is an inverse relationship between interest rates and bond values.

Question 76

You are considering the purchase of one of two different bonds, a muni, which currently yields 6%, and a corporate, which currently yields 10%. If you are trying to maximize your return and you are in a 38% tax bracket, which of the following is true?

A) The muni bond has a better yield for you.
B) The corporate bond has a better yield for you.
C) The bonds have identical yields for you.
D) There is not enough information to determine which is a better yield for you.

Question 77

For a long-term investor, the yield to maturity is the most important yield to determine.

Question 78

Michael Milkman has suggested that you consider the purchase of some bonds that are rated BB or below. He is asking you to purchase ________ bonds.

A) junk
B) very risky
C) high-yield
D) All of the above
E) Only A and B.

Question 79

When a bond is bought at a premium price above its par value, the current yield will be lower than the coupon rate.

Question 80

You have a corporate bond that pays interest every six months. Its par value is $1,000 and it carries a coupon rate of 10%. What is your accrued interest on the bond if it has been four months since interest was last paid?

A) $33.33
B) $50.00
C) $66.66
D) $100.00
E) none of the above