Deck 15: Investing in Bonds

Question 1

Although unpopular a few years back, more and more corporations are issuing bearer bonds.

Answer 1

False

Question 2

If overall interest rates in the economy fall, then a corporate bond with a fixed interest rate will decrease in value.

Answer 2

False

Question 3

The bond debenture is a legal document that details all of the conditions relating to a bond issue.

Answer 3

False

Question 4

In reality, there is no guarantee that convertible bondholders will convert to common stock even if the price of the common stock does increase.

Question 5

A convertible bond is a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.

Question 6

Corporate bonds are a form of equity financing that does not have to be repaid.

Question 7

Bond interest payments are a tax-deductible business expense.

Question 8

A sinking fund is a fund to which deposits are made each year for the purpose of redeeming a bond issue.

Question 9

With the use of technology and computers, the book entry form of bond ownership is no longer used.

Question 10

Because of higher interest rates, zero-coupon bonds are sold at a premium price above the face value that will be paid at maturity.

Question 11

A mortgage bond is a corporate bond that is secured by various assets of the issuing firm.

Question 12

All bonds in a serial bond issue mature on the same date.

Question 13

Interest payments for registered bonds are usually mailed directly to the bondholder of record.

Question 14

A corporate bond is a corporation's written pledge that it will repay a specified amount of money with interest.

Question 15

Because bonds are considered debt financing that must be repaid at maturity, the corporation's financial stability has little effect on the bond's value between the issue date and the maturity date.

Question 16

The only way an investor can make money on a bond investment is to hold the bond until maturity.

Question 17

Treasury bills are issued in minimum units of $10,000 with maturities that range from 10 to 30 years.
T-bills are issued in a minimum unit of $100 with additional increments of $100 above the minimum. Maturities are 4, 13, 26, and 52 weeks.

Question 18

A registered bond is a bond whose ownership is registered in the owner's name by the issuing company.

Question 19

A subordinated debenture is a more secure investment than a mortgage bond.

Question 20

Maturity dates for corporate bonds generally range from 5 to 10 years.

Question 21

Generally, interest on corporate bonds is paid every:

A) month.
B) three months.
C) six months.
D) nine months.
E) year.

Question 22

Since 1990, bond yields for high-quality corporate bonds have increased significantly.

Question 23

A general obligation bond is a bond that is repaid from the income generated by the project it is designed to finance.
Issued in minimum units of $100 that have a 30-year maturity date.

Question 24

For Moody's and Standard & Poor's, the first four individual bond-rating categories represent investment-grade securities.

Question 25

The current yield for a bond is determined by dividing the annual income amount by the current market value.

Question 26

Which one of the following statements is true?

A) Corporate bonds do not have a maturity date.
B) The maturity dates for corporate bonds are generally less than a year.
C) Corporate bonds do not have any default risk.
D) Corporate bonds are a form of equity.
E) Long-term corporate bonds have maturities over 15 years.

Question 27

Treasury notes are issued in $100 units with a maturity of more than 1 year, but not more than 10 years.

Question 28

Anyone who is in physical possession of a bearer bond can collect interest payments and the face value of the bond at maturity regardless of whether or not they are the rightful owner.

Question 29

The legal conditions for a corporate bond are described in the:

A) trustee contract.
B) bondholder's covenant.
C) corporate charter.
D) bond indenture.
E) bond debenture.

Question 30

Assume that you purchase a $1,000 corporate bond that pays 9.25 percent interest. What is the amount of interest that you receive each year?

A) $1,000.00
B) $92.50
C) $92.00
D) $90.00
E) $9.25

Question 31

Nancy Groom owns a $1,000 corporate bond that pays 8.5 percent. What is the amount of each interest payment?

A) $4.25
B) $42.50
C) $85.00
D) $850.00
E) $425.00

Question 32

For government bonds, the bid price is the price that a dealer is willing to pay for a government security.

Question 33

Although there is a great deal of information on the internet about stock investments, it is impossible to evaluate bonds using the internet.

Question 34

With a registered coupon bond, only the registered owner can collect the principal at maturity, but interest payments can be paid to anyone.

Question 35

You own a $1,000 bond that pays 9.25 percent interest. What is the amount of interest you will receive each six months?

A) $4.62
B) $9.25
C) $92.50
D) $46.25
E) $23.13

Question 36

Tax-exempt bonds offer slightly higher interest rates than corporate bonds.

Question 37

Treasury bonds are issued in $5,000 units with 10-year maturities.
T-bonds are issued in minimum units of $100 that have a 30-year maturity.

Question 38

Insured municipal bonds offer slightly lower interest rates than uninsured bonds because of the reduced risk of default.

Question 39

The yield to maturity takes into account the relationship among a bond's maturity value, the time to maturity, the current price, and the dollar amount of interest.

Question 40

The financially independent firm or individual that acts as the bondholders' representative is the:

A) chairman of the board.
B) president of the corporation.
C) debenture holder.
D) indenture holder.
E) trustee.

Question 41

A type of bond that is unsecured and gives bondholders a claim secondary to that of other designated bondholders with respect to both income and assets is called a:

A) debenture bond.
B) mortgage bond.
C) subordinated debenture.
D) preemptive bond.
E) treasury bond.

Question 42

A corporate bond that is secured by various assets of the issuing firm is called a(n) ____________ bond.

A) debenture
B) mortgage
C) indenture
D) preemptive
E) treasury

Question 43

What is the approximate market value for of a $1,000 corporate bond that pays 9 percent interest when comparable bonds are paying 8 percent?

A) $800
B) $900
C) $1,000
D) $1,125
E) $1,600

Question 44

Bonds of a single issue that mature on different dates are called ____________ bonds.

A) debenture
B) mortgage
C) sinking fund
D) subordinate
E) serial

Question 45

John Peterson purchased a bond that is priced far below its face value, that makes no interest payments, and that will be redeemed at its face value at maturity. In all likelihood, he purchased a(n) ____________ bond.

A) debenture
B) convertible
C) indenture
D) registered
E) zero-coupon

Question 46

Sandra Peterson has been thinking about investing in corporate bonds. She is concerned about safety and wants the most secure bond investment possible. She would most likely invest in ____________ bonds.

A) debenture
B) mortgage
C) speculative
D) convertible
E) subordinated

Question 47

A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's stock is called a(n) ____________ bond.

A) debenture
B) mortgage
C) indenture
D) convertible
E) subordinated

Question 48

A call feature:

A) allows bondholders to convert their bond to a specified number of shares of common stock.
B) is not available on corporate bonds.
C) allows the corporation to buy outstanding bonds from current bondholders before the maturity date.
D) is only available with government securities.
E) is guaranteed by the corporation.

Question 49

A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue is called a(n) ____________ fund.

A) serial
B) sinking
C) debenture
D) indenture
E) money

Question 50

XYZ Corporation wants to retire a $60 million bond issue before the maturity date. In order to call the bonds in this issue, the corporation must pay the bondholders the face value plus a premium. What is the typical premium for bonds that have been called?

A) $100
B) $50-$100
C) $20-$75
D) $10-$25
E) $1-$10

Question 51

If overall interest rates in the economy fall, a corporate bond with a fixed interest rate will generally:

A) increase in value.
B) decrease in value.
C) remain unchanged.
D) become worthless.
E) be returned to the corporation.

Question 52

Which type of bond is not registered in the investor's name?

A) Revenue
B) General obligation
C) Bearer
D) Zero-coupon
E) Tax-exempt

Question 53

A bond that is backed only by the reputation of the issuing corporation is called a(n) ____________ bond.

A) debenture
B) mortgage
C) indenture
D) preemptive
E) treasury

Question 54

A bond that is listed in the owner's name by the issuing company is called a ______________ bond.

A) certified
B) coupon
C) registered
D) zero-coupon
E) general obligation

Question 55

What is the approximate market value of a $1,000 corporate bond that pays 8 percent interest when comparable bonds are paying 9 percent interest?

A) $80
B) $90
C) $889
D) $1,000
E) $1,125

Question 56

Which one of the following statements is true?

A) Convertible corporate bonds are more secure than government bonds.
B) Convertible bonds often pay 3 to 4 percent more interest than nonconvertible bonds.
C) Because of the conversion feature, it is not necessary to evaluate convertible, corporate bonds.
D) There is no guarantee that bondholders will convert to common stock even if the market value of the common stock does increase in value.
E) Even if convertible bondholders convert their investment to common stock, the bondholders still receive interest payments.

Question 57

A $l,000 corporate bond is convertible to 25 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting the bond to stock?

A) $10
B) $20
C) $30
D) $40
E) $50

Question 58

Today, bond ownership records are maintained using a process called:

A) certified registration.
B) book entry.
C) revenue recognition process.
D) coupon registration.
E) general obligation process.

Question 59

Which one of the following statements is correct?

A) Stock is a form of debt capital.
B) Stock must be repaid at maturity.
C) Bonds are a form of debt capital.
D) Bonds do not have to be repaid at maturity.
E) Interest payments to bondholders must be declared by the board of directors.

Question 60

If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally:

A) increase in value.
B) decrease in value.
C) remain unchanged.
D) become worthless.
E) be returned to the corporation.

Question 61

Which type of bond would provide the most price stability?

A) Discount
B) Short-term
C) Long-term
D) Speculative
E) Zero-coupon

Question 62

Investors purchase corporate bonds for:

A) interest income.
B) possible increase in value.
C) repayment at maturity.
D) All of these features are reasons to purchase a corporate bond.
E) None of these features are reasons to purchase a corporate bond.

Question 63

Which one of the following statements is false?

A) It is possible to obtain information about a corporation that issues a bond by accessing the corporation's home page on the internet.
B) Price information about corporate bonds is available on the internet.
C) You can research bonds online but you cannot trade them online.
D) There are fewer websites that provide information on bonds as compared to websites that provide information on stocks.
E) All of the other answers are true.

Question 64

A bond that is repaid from the income generated by the project it is designed to finance is called a(n):

A) Treasury bill.
B) savings bond.
C) revenue bond.
D) general obligation bond.
E) agency bond.

Question 65

The interest rate for a $1,000 bond is 6 percent. If comparable bonds are paying 8 percent, what is the approximate market value for of the 6 percent bond?

A) $1,000
B) $800
C) $750
D) $600
E) $500

Question 66

A bond backed by the full faith, credit, and unlimited taxing power of the municipality that issued it is called a ____________ bond.

A) debenture
B) mortgage
C) secured
D) general obligation
E) revenue

Question 67

When investors purchase bonds that mature at regular intervals in order to balance risk and return, they are creating a:

A) bond ladder.
B) staggered investment program.
C) incremental investment program.
D) step-up allocation program.
E) guaranteed investment program.

Question 68

You are a taxpayer in the 28 percent tax bracket and you own a tax-exempt bond that pays 5 percent. What is your taxable equivalent yield?

A) 5.00 percent
B) 6.00 percent
C) 6.94 percent
D) 7.20 percent
E) 14.40 percent

Question 69

A government security issued in $100 units with maturities of more than one year but not more than ten years is called a:

A) subordinated bond.
B) Treasury bill.
C) Treasury note.
D) Treasury bond.
E) savings bond.

Question 70

June Tavia is trying to calculate the taxable equivalent yield for a municipal bond. If the bond she owns pays 4.5 percent interest and she is in the 25 percent tax bracket, what is the taxable-equivalent yield?

A) 4.50 percent
B) 5.50 percent
C) 6.00 percent
D) 7.72 percent
E) 6.93 percent

Question 71

The interest rate for a $1,000 bond is 9 percent. If comparable bonds are paying 7 percent, what is the approximate market value for of the 9 percent bond?

A) $1,286
B) $1,090
C) $1,000
D) $900
E) $700

Question 72

The commission for purchasing a $1,000 bond would most likely be:

A) $0.50.
B) $1 to $2.
C) $5 to $35.
D) $35 to $50.
E) over $50.

Question 73

Dave Johnson's objective was to purchase a government bond that provided some protection against inflation and higher prices. To fulfill this objective, John purchased a:

A) T-bill.
B) T-note.
C) T-bond.
D) TIPS.
E) general obligation bond.

Question 74

If a bond is quoted in the newspaper at 88.75, the current price of a $1,000 face value bond is:

A) $75.00.
B) $88.00.
C) $88.75.
D) $887.50.
E) $1,000.00.

Question 75

The price at which a dealer is willing to sell a government security is known as the ____________ price.

A) bid
B) asked
C) contract
D) government
E) adjusted

Question 76

A government security issued in minimum units of $100 with maturities that are one year or less is called a:

A) subordinated bond.
B) Treasury bill.
C) Treasury note.
D) Treasury bond.
E) savings bond.

Question 77

Which one of the following statements is true?

A) All local newspapers contain information on bond prices.
B) In bond quotations, prices are given as a percentage of the bond's face value.
C) The face value for most corporate bonds is $5,000.
D) To find the market price of a corporate bond, you must contact the corporation that originally issued the bond.
E) To find the market price of a corporate bond, you must call a stockbroker.

Question 78

If a bond is quoted in the newspaper at 92, the current price of a $1,000 face value bond is:

A) $9.20.
B) $92.00.
C) $920.00.
D) $1,000.00.
E) $1,092.00.

Question 79

Which one of the following statements is false?

A) The federal government sells bonds and securities to obtain financing.
B) U.S. government Treasury securities carry a reduced risk of default when compared to corporate securities.
C) U.S. government Treasury securities offer lower interest rates than corporate bonds.
D) Most individual investors that purchase Treasury bills, notes, and bonds bid competitively.
E) Treasury securities may be purchased through banks or brokers.

Question 80

A government security issued in minimum units of $100 with a 30-year maturity is called a:

A) subordinated bond.
B) Treasury bill.
C) Treasury note.
D) Treasury bond.
E) savings bond.