Deck 12: Investing in Bonds

Question 1

Sun Corporation wants to retire a $50 million bond issue before the maturity date. What is the typical call premium per bond that Sun Corporation must pay for the bonds to be called back?

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

Answer 1

$10 - $50

Question 2

Which of the following statements is correct?

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

Answer 2

Bonds are a form of debt capital.

Question 3

A bond that is unsecured is called a(n)

A) treasury bond.
B) savings bond.
C) junk bond.
D) debenture.
E) debt bond.

Answer 3

debenture.

Question 4

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 5

Assume that you purchase a $1,000 corporate bond that pays 10-3/4 percent interest. What is the amount of interest that you receive each year?

A) $1,000
B) $107.50
C) $100
D) $10
E) $10.75

Question 6

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

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

Question 7

Melanie Nash owns one $1,000 corporate bond issued by Chevron. The bond pays 6.5 percent. If interest is paid semiannually, what is the amount of the cheque that Ms. Nash will receive at the end of each six-month period?

A) $6.25
B) $32.50
C) $65
D) $325
E) $1,000

Question 8

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 9

Which of the following statements is true?

A) Convertible corporate bonds are more secure than government bonds.
B) Convertible bonds often pay 1 to 2 percent more interest than nonconvertible bonds.
C) Because of the conversion feature, it is not necessary to evaluate convertible, corporate bonds.
D) In reality, 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 10

Generally, interest on corporate bonds is paid every

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

Question 11

Assume that you purchased a $1,000 Mobil Corporation bond that pays 8.25 percent interest. What is the amount of interest you would receive each six months?

A) $4.125
B) $8.25
C) $82.50
D) $41.25
E) $1,000

Question 12

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) money
C) debenture
D) indenture
E) sinking

Question 13

A bond that is 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 14

A $l, 000 corporate bond is convertible to 50 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting a bond to the company's common stock?

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

Question 15

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 16

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(n):

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

Question 17

Sarah 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) subordinated.
C) indenture
D) convertible
E) mortgage

Question 18

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

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

Question 19

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 20

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 21

Justin Parkinson purchased a bond at a price far below its face value, makes no interest payments, and 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 22

The highest bond rating issued by the Dominion Bond Rating Service (DBRS) is

A) AAA.
B) Aaa.
C) A+.
D) BB.
E) Excellent.

Question 23

Investors purchase corporate bonds for

A) interest income.
B) possible increase in value.
C) repayment at maturity.
D) interest income, possible increase in value, and repayment at maturity.
E) secured promise to pay interest made by the issuing company.

Question 24

If a bond was quoted in the newspaper at 75, the price in dollars was:

A) $7.50
B) $75
C) $750
D) $1,000
E) $1,075

Question 25

Which of the following methods could be used by an investor to obtain a corporation's annual report?

A) the Internet
B) a reader's service
C) an 800 telephone number
D) a written request
E) the Internet, a reader's service, an 800 telephone number, and a written request could be used to obtain a corporation's annual report.

Question 26

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 27

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

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

Question 28

A bond issued with detachable coupons that the bondholder must present to a paying agent or the issuer in order to receive interest payments is called a __________ bond.

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

Question 29

Which of the following statements is false?

A) The federal government sells bonds and securities to finance both the national debt and the government's ongoing activities.
B) Federal government securities carry a reduced risk of default when compared to corporate securities.
C) Federal 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 30

A government security issued in minimum units of $1,000 with maturities that are less than one year is called a:

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

Question 31

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 the 6 percent bond?

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

Question 32

When a bond is selling for less than its face value, it is said to be selling at a:

A) discount.
B) premium.
C) commission.
D) conservative value.
E) prospectus value.

Question 33

Which 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 34

When a bond is selling for more than its face value, it is said to be selling at a:

A) discount.
B) premium.
C) commission.
D) conservative value.
E) prospectus value.

Question 35

If overall interest rates in the economy decrease, 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 36

David Leclair purchased a federal government bond. The bond had a face value of $500. He purchased a:

A) treasury bill.
B) treasury note.
C) treasury bond.
D) Canada Savings Bond.
E) general obligation bond.

Question 37

Which of the following statements is false?

A) Generally, it is impossible to evaluate bond investments by accessing a corporation's home page.
B) Price information about corporate bonds is available on the Internet.
C) Although it is possible to use the Internet to evaluate a corporate bond issue, it is impossible to buy or sell the bond issue.
D) There are fewer Web sites that provide information on bonds when compared to Web sites that provide information for stocks.
E) You can either write or telephone the corporation and request an annual report.

Question 38

What is the approximate market value for 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 39

The type of bond that is not registered in the investor's name is a ___________ bond.

A) revenue
B) general obligation
C) tax-exempt
D) zero-coupon
E) bearer

Question 40

What is the annualized yield of a 200 days T-Bill with a purchase price of $940.00?

A) 20.0%
B) 17.15%
C) 9.40%
D) 6.38%
E) 11.90%

Question 41

The dollar amount repaid at maturity on a bond is referred to as its __________________.

A) Face value
B) market value
C) coupon payment
D) capital gain
E) future value

Question 42

A $l,000 corporate bond is convertible to 20 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting a bond to the company's common stock?

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

Question 43

Assume that you purchase a $1,000 corporate bond that pays 5.5 percent interest. What is the amount of interest that you receive each year?

A) $1,000
B) $1,055
C) $55
D) $550
E) $0

Question 44

The interest rate for a $1,000 bond is 6 percent. If comparable bonds are paying 9 percent, what is the approximate market value for the 6 percent bond?

A) $1,000
B) $900
C) $750
D) $667
E) $500

Question 45

If a bond is purchased at a price above the face value, the yield to maturity is:

A) greater than the stated interest rate.
B) the same as the stated interest rate.
C) less than the stated interest rate.
D) zero.
E) of no significance.

Question 46

Which of the following investment characteristics would be favorable to an investor?
I. Callable
II. Convertible
III. Cumulative dividends
IV. Pledge of collateral

A) I, II and III are correct
B) II, III and IV are correct
C) I and III are correct
D) I, II, III and IV are all correct
E) I and II are correct

Question 47

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

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

Question 48

Assume that you purchased a $1,000 Rogers bond that pays 6 percent interest. What is the amount of interest you would receive each six months?

A) $6.00
B) $3.00
C) $60.00
D) $30.00
E) $1,000

Question 49

Treasury bills are:

A) discounted securities sold by the government of Canada
B) discounted securities sold by corporations
C) regular interest bonds
D) compound interest bonds
E) simple-interest bonds

Question 50

What is the current yield for a $1,000 corporate bond that pays 7 percent and has a current market value of $975?

A) 7 percent
B) 7.18 percent
C) 8.33 percent
D) 9 percent
E) 10 percent

Question 51

The lowest bond rating issued by the DBRS is:

A) A.
B) B.
C) C.
D) D.
E) Default.

Question 52

Which ranks bonds from lowest to highest risk?

A) Federal marketable bonds, corporate bonds, provincial bonds
B) Canada savings bonds, municipal bonds, provincial bonds
C) Canada savings bonds, provincial bonds, federal marketable bonds
D) Provincial bonds, municipal bonds, corporate bonds
E) Provincial bonds, Canada saving bonds, corporate bonds

Question 53

If a bond was quoted in the newspaper at 60, the price in dollars was:

A) $6.00
B) $60
C) $600
D) $1,000
E) $1,060

Question 54

The yield to maturity takes into account the relationship among a bond's maturity value and

A) the time to maturity.
B) the current price.
C) the dollar amount of interest.
D) the corporate rate
E) the time to maturity, the current price, the dollar amount of interest, and the corporate rate.

Question 55

Phillip owns two (2) $1,000 corporate bonds issued by Exxon. The bond pays 5 percent. If interest is paid semiannually, what is the amount of the cheque that Phillip will receive at the end of each six-month period?

A) $5
B) $10
C) $50
D) $100
E) $1,000

Question 56

Identify the incorrect statement.

A) Canada Savings Bonds are marketable bonds.
B) Long-term bonds embody more inflation risk than short-term bonds.
C) A bond denominated in U.S. dollars subjects a Canadian bondholder to foreign currency risk.
D) Bonds sold before they mature can incur capital gains or losses.
E) Provincial bonds are relatively risk free

Question 57

Generally, Canadian government securities issued by the Treasury Department

A) are not graded because they are risk-free.
B) receive the DBRS' AAA rating.
C) receive the Standard & Poor's AA rating.
D) receive the Treasury Department's "risk-free" rating.
E) are given the same rating by all the bond rating companies.

Question 58

Which of the following differentiates a bond from a GIC?
I. Only bonds are subject to price risk.
II. Only bonds can generate a capital gain.
III. Only bonds are marketable securities.

A) I and II, only
B) II and III, only
C) I and III only
D) I, II and III
E) I only

Question 59

If a bond is purchased at a price below the face value, the yield to maturity is:

A) greater than the stated interest rate.
B) the same as the stated interest rate.
C) less than the stated interest rate.
D) zero.
E) of no significance.

Question 60

A corporate bond rated B by the DBRS would be suitable for:

A) every investor.
B) very cautious investors.
C) speculators.
D) no one because the bond issue is in default.
E) knowledge investors.

Question 61

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

Question 62

The sale of bonds can also improve a corporation's financial leverage.

Question 63

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

Question 64

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

Question 65

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

Question 66

A corporate bond rated AAA by the DBRS would be suitable for:

A) every investor.
B) very cautious investors.
C) speculators.
D) no one because the bond issue is in default.
E) knowledge investors.

Question 67

Maturity dates for corporate bonds generally range from 5 to 7 years.

Question 68

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

Question 69

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

Question 70

A warrant is an option that is detachable from the associated bond that gives the holder the right to purchase the firms common shares.

Question 71

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

Question 72

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

Question 73

What is the current yield for a $1,000 corporate bond that pays 7 percent and has a current market value of $800?

A) 7 percent
B) 7.5 percent
C) 8.00 percent
D) 8.75 percent
E) 10 percent

Question 74

Collateral trust bonds are secured, through a pledge of real property.

Question 75

A registered coupon bond is registered for interest, but not for the principal amount.

Question 76

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

Question 77

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 78

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 79

Mortgage bonds are agreements that pledge land, buildings, or equipment as securities for a loan.

Question 80

The trustee is an independent firm that acts as the bondholders' representative.