Deck 14: Bonds

Question 1

If you buy a municipal bond for $10,000 with an interest rate of 4% and hold it to its maturity date in 10 years,what amount will you receive back,including interest,and how much Federal Income tax will you pay over that time (assuming that you are in the 25% bracket)?

A)$14,000; $1,000
B)$10,500; $1,000
C)$14,000; $0
D)$14,000; $2,000

Answer 1

$14,000; $0

Question 2

You purchased a $10,000 convertible bond from Ajax Corporation at issue.At the time the bond was issued,Ajax's stock traded at $15 per share.Ajax offered a conversion privilege of 20 shares of common stock per $1,000 in bonds.This stock now trades at $60.Assuming there are no costs to convert the bonds to stock,what is the minimum the bond would be trading for on the open market?

A)$10,000 plus accrued interest
B)$11,000 plus accrued interest
C)$3,000 plus accrued interest
D)$12,000

Answer 2

$12,000

Question 3

Which is not a debt obligation that the U.S.Treasury issues?

A)U.S.savings bonds
B)Federal Agency Stock (e.g.FNMA or FRDMAC)
C)Treasury bills,notes,and bonds
D)Treasury Inflation-Protected Securities (TIPS)

Answer 3

Federal Agency Stock (e.g.FNMA or FRDMAC)

Question 4

If you need to sell a bond on the secondary market before the maturity date,________.

A)you will receive only the exact amount you invested
B)you will receive less than face value if current interest rates are higher than your bond's coupon rate
C)you will receive more than face value if current interest rates are higher than your bond's coupon rate
D)you will receive less than face value if current interest rates are lower than your bond's coupon rate

Question 5

________ are short-term government securities with maturities of 52 weeks or less.

A)Corporate bonds
B)Municipal bonds
C)TIPS
D)Treasury bills

Question 6

What is the inverse relationship between bond prices and interest rates?

A)When interest rates go up,bond prices fall; when interest rates go down,bond prices increase.
B)When interest rates go down,bond prices fall; when interest rates go up,bond prices increase.
C)When interest rates go up,bond prices increase; when interest rates go down,bond prices increase.
D)There is no inverse relationship between bond prices and interest rates.

Question 7

The closer a bond comes to reaching its maturity date,________.

A)the more impact changes in interest rates will have on its value
B)the more interest rates will align with the bond's value
C)the closer it will be to its par value
D)All options are true.

Question 8

Selling a bond at a premium is ________.

A)selling the bond for more than face value
B)selling the bond for less than face value
C)selling the bond for face value
D)increasing the interest rate on the bond

Question 9

How is interest taxed on U.S.Treasury-issued bonds?

A)Interest is taxable by the state but not the local government.
B)Interest is taxable by the state and the local government.
C)Interest is not taxable by the state but can be taxed by the local government.
D)Interest is not taxable by the state or the local government.

Question 10

Selling a bond at a discount is ________.

A)selling the bond for more than face value
B)selling the bond for less than face value
C)selling the bond for face value
D)lowering the interest rate on the bond

Question 11

If you buy a municipal bond for $10,000 with an interest rate of 4% and hold it to its maturity date in 10 years,what amount will you receive back when the bond comes due in 10 years,and how much Federal Income tax will you pay (assuming that you are in the 25% bracket)?

A)$10,000; $0
B)$10,000; $2,500
C)$14,000; $1,000
D)$15,500; $0

Question 12

If you were to buy a municipal bond for $10,000 with an interest rate of 4% and hold it to its maturity date in 10 years,how often would you receive an interest payment,and for what amount?

A)Monthly; $33.34
B)Every six months; $200
C)Every six months; $400
D)At 10 years; $4,000

Question 13

A(n)________ is a debt instrument issued by governments and companies for the purpose of raising money to fund construction,take on new projects,or grow business.

A)Stock
B)Bond
C)Coupon
D)Equity

Question 14

Municipal bonds are

A)generally taxable by federal and most state and local taxes.
B)generally taxable by federal taxes but exempt from most state and local taxes.
C)generally exempt from federal taxes and most state and local taxes.
D)generally exempt from federal taxes but taxable by state and local governments.

Question 15

If you buy a corporate bond for $5,000 with an interest rate of 10% and hold it to its maturity date in 10 years,what interest payment amount will you receive every 6 months and what is the total amount of interest paid?

A)$500; $5,000
B)$250; $2,500
C)$250; $5,000
D)Nothing is paid out until bond maturity.

Question 16

________ are marketable securities whose principal is adjusted by changes in the consumer price index to protect them against inflation; as such,their principal increases with inflation or decreases with deflation.

A)Corporate bonds
B)Municipal bonds
C)TIPS
D)Treasury bills

Question 17

Bond call provisions allow the bond issuer to ________ than the current interest rates.

A)sell back the bond before the maturity date,if the coupon rates paid are lower
B)sell back the bond before the maturity date,if the coupon rates paid are higher
C)buy back the bond before the maturity date,if the coupon rates paid are lower
D)buy back the bond before the maturity date,if the coupon rates paid are higher

Question 18

As a bondholder,you ________.

A)are lending money to a corporation or government entity
B)are a part owner of the corporation
C)have no risk in losing your money
D)can only receive your principal investment when the bond matures

Question 19

An advantage of a convertible corporate bond is ________.

A)its callable provision
B)the fact that it adjusts with inflation
C)the potential for the bond to split,thus doubling your value
D)the potential conversion of the bond into equity,as well as the cash flow from the coupon payments

Question 20

What is a bond coupon?

A)A discount for buying bonds
B)A method for purchasing bonds
C)The coupons that used to be "clipped" and redeemed by the holder,who then received the interest payment
D)The principal payment of a bond

Question 21

TIPS ________.

A)offer an interest rate that is adjusted by changes in the consumer price index
B)include principal that is adjusted by changes in the consumer price index
C)have to be held to maturity
D)pay interest monthly

Question 22

If a corporation goes into bankruptcy,________.

A)subordinate bondholders get paid before senior bondholders
B)senior bondholders get paid before subordinate bondholders
C)bondholders are the last to get paid
D)bondholders are the first to get paid

Question 23

Treasury notes ________.

A)can be purchased only through a competitive bid
B)can be purchased only through a noncompetitive bid
C)can be purchased only through Treasury Direct
D)pay interest that is exempt from state and local income taxes

Question 24

The present value of a bond is calculated by discounting the future ________ to be received from the bond.

A)coupon payments
B)principal payment
C)cash flows (coupon payments and principal payment)
D)interest

Question 25

________ is the interest rate you will receive if you buy a bond today and hold it to maturity,including all payouts,coupons,and capital gains or losses.

A)Coupon yield (rate)
B)Dividend yield (rate)
C)Investment yield (rate)
D)Yield to maturity

Question 26

Municipal bonds ________.

A)have no default risk
B)have tax advantages
C)are issued by the federal government
D)are repaid by the revenue generated by the project they have been used to fund

Question 27

A ________ bond is a hybrid security with features of both debt and equity.

A)convertible
B)corporate
C)municipal
D)treasury

Question 28

Which is not one of the three biggest credit rating companies for those issuing bonds?

A)Bloomberg
B)Fitch
C)Moody's
D)Standard & Poor's

Question 29

A bond credit rating assesses the ________ of a government's or corporation's debt issues.

A)creditworthiness
B)principal
C)interest rate
D)value

Question 30

What is the yield to maturity (YTM)on a bond that sells for $950,has a coupon rate of 4%,matures in six years,and has a par value of $1,000?

A)6%
B)4.99%
C)4.26%
D)3.71%

Question 31

Bond rating agencies classify bonds based on the ________.

A)creditworthiness of the issuer
B)potential for growth and success of the issuer
C)personal guarantee of the corporate officers and board of directors
D)stock value of the corporation

Question 32

Corporate bonds ________.

A)have default risk
B)have tax advantages
C)are issued by the federal government
D)provide ownership in the corporation

Question 33

Treasury bills ________.

A)pay interest semiannually
B)pay interest monthly
C)are typically issued at a discount from the face amount
D)are issued for greater than 10 years

Question 34

________ is the interest rate paid on the bond as a percentage of the bond's current market price.

A)Coupon yield (rate)
B)Dividend yield (rate)
C)Investment yield (rate)
D)Yield to maturity

Question 35

Convertible bonds are corporate bonds ________.

A)that can be converted to common stock
B)that can be called early by the issuer
C)that can be converted to the present interest rate
D)that do not pay interest but issue common stock

Question 36

Junk bonds,or high-yield bonds,________.

A)are investment-grade bonds
B)are bad investments that should be avoided
C)are classified by bond rating agencies as BB,BA,or lower
D)have a guaranteed return

Question 37

High-yield bonds (also known as ________ bonds)are corporate bonds that are issued by organizations that do not qualify for "investment-grade" ratings.

A)convertible
B)jewel
C)junk
D)lottery

Question 38

________ are debt securities issued by a state,municipality,or county to finance capital expenditures.

A)Corporate bonds
B)Municipal bonds
C)TIPS
D)Treasury bills

Question 39

Series EE U.S.savings bonds differ from most other bonds in that ________.

A)interest is paid out quarterly
B)interest is paid out semiannually
C)interest is paid out monthly
D)interest accrues and is paid out at maturity

Question 40

________ are debt obligations issued by private and public corporations.

A)Corporate bonds
B)Municipal bonds
C)TIPS
D)Treasury bills

Question 41

________ is (are)a good alternative if a small investment makes it difficult to invest in a diversified portfolio of bonds.

A)Penny bonds
B)Junk bonds
C)A bond mutual fund
D)Stock

Question 42

The higher the rating on the bond,the ________.

A)higher the interest rate the issuer has to pay
B)higher the coupon rate to attract investors
C)lower the coupon rate needed to attract investors
D)None of the choices are correct; the rating has no effect on the interest rate and does not rate the risk of a bond.

Question 43

If you were to buy a $10,000 Treasury note on a noncompetitive bid that matures in seven years at 5% interest,what would the interest payments be,and how often would you receive interest?

A)$250 every 6 months
B)$500 every 6 months
C)$3,500 at 7 years
D)$50 a month

Question 44

U.S.Treasury bonds can be bought ________.

A)at www.TreasuryDirect.gov
B)at most local financial institutions
C)through payroll deductions
D)All options are correct.

Question 45

Building a bond ladder is the process of buying bills,notes,and bonds that mature ________.

A)at different rates
B)in different years
C)in your later years
D)in synchronization

Question 46

www.TreasuryDirect.gov is ________.

A)only for major investors who can buy U.S.government bonds
B)the only place to buy Treasury bills,notes,and bonds
C)too complicated for the common person to understand
D)where anyone can go to purchase EE-Bonds,I-Bonds,and Treasury bills,notes,and bonds

Question 47

When looking to invest in bonds,first ________.

A)know your investment objective
B)look at the return on U.S.Treasuries to determine the risk-free rate
C)ask a broker/dealer/financial planner what to buy
D)study a bond screener to find a bond you would like to buy

Question 48

Bond mutual funds ________.

A)provide immediate bond diversification
B)have a professional fund manager who evaluates which bonds to buy and sell
C)have management fees associated with them
D)All options are correct.

Question 49

Bonds are known as ________ because they pay a fixed amount of cash interest.

A)dependable securities
B)fixed securities
C)fixed-income securities
D)safe securities

Question 50

A bond ladder ________.

A)helps reduce the risk of interest rates changes by spacing out the maturities
B)refers to monthly contributions into a bond mutual fund
C)guarantees that you will always get the best interest rates on the bonds you invest in
D)is a strategy that helps you achieve your financial goals by "climbing the ladder"

Question 51

Which of the following is not one of the advantages of bond mutual funds?

A)Immediate diversification of the bond portfolio
B)Having a professional fund manager evaluate which bonds to buy and sell
C)Having to pay for the professional fund manager and other expenses in the expense ratio,thus lowering yield
D)Diversification of risk,as the investment is spread among government,corporate,and mortgage-backed bonds

Question 52

The value of a bond is determined by ________.

A)calculating the present value of the future cash flows
B)calculating the future value of future cash flows
C)calculating the return for a similar risk investment
D)discounting present cash value to determine future value

Question 53

The tax advantage of corporate bonds is that there is ________.

A)no federal income tax on the interest and capital gains earned
B)no state income tax on the interest and capital gains earned
C)no federal or state income tax on the interest and capital gains earned
D)None of the choices are correct; there is no tax advantage for corporate bonds.

Question 54

If you expect interest rates to go up,buy ________.

A)long-term bonds
B)short-term bonds
C)intermediate-term bonds
D)bond mutual funds

Question 55

If interest rates are expected to decline,invest heavier in ________.

A)long-term bonds whose prices will increase the most with the fall of interest rates
B)short-term bonds whose prices will increase the most with the fall of interest rates
C)short-term bonds whose prices will increase the least with the rise of interest rates
D)nothing; hang on to your cash

Question 56

Diversification is important in your bond portfolio because it ________.

A)reduces the effect of default risk
B)keeps you from getting bored with your investments
C)spreads your wealth
D)None of the choices are correct; diversification within your bond portfolio is not important.

Question 57

Corporate bonds can be purchased through a(n)________.

A)full-service broker
B)discount broker
C)online broker
D)All options are correct.

Question 58

If you had $10,000 to invest in bonds and your intent was to ladder the bond investments at segments of $1,000 every year,for what period of time would each bond be set?

A)each $1,000 would purchase a 10-year bond,one per year,for the next ten years
B)each year,$10,000 would purchase a single 1-year bond
C)purchase one 10-year bond for $10,000
D)each $1,000 would purchase a 1-year bond,one per year,for the next ten years

Question 59

Which is not a risk associated with bonds?

A)Call risk
B)Default risk
C)Interest-rate risk
D)Recession risk

Question 60

________ protects against interest rate risk by buying bills,notes,and bonds that mature in different years.

A)Bestriding
B)Laddering
C)Spanning
D)Straddling

Question 61

For convertible corporate bonds,the company pays the bondholder back in dollars when the bond is converted.

Question 62

Bondholders can force a company into bankruptcy if the company does not pay the interest as promised and,in the case of bankruptcy,bondholders have a priority claim on an issuer's assets over that of a shareholder.

Question 63

Which of the following statements is true?

A)It is easier for individuals to buy and sell corporate bonds.
B)It is easier for individuals to buy and sell government bonds.
C)All bond transactions should be handled through an investment advisor.
D)Bonds are too complicated for an individual to buy on his or her own.

Question 64

Because bonds are repaid or redeemed on their maturity date,they are considered safer than stock as a stock purchase is never "repaid."

Question 65

Laddering does not reduce interest rate risk as it involves bonds coming due at different times.

Question 66

When TIPS mature,you are paid the adjusted principal or original principal,whichever is greater.

Question 67

As an investor,you should want to purchase bonds with a call feature only if the bonds offer a slightly higher return than similar bonds without a call feature,which compensates you for the call risk.

Question 68

Buying and selling corporate bonds is as easy as buying and selling stocks,given that bonds tend to trade every few days and there are fewer buyers and sellers.

Question 69

Convertible bonds typically have low coupon rates but are of additional value through the option to convert the bond to stock and thereby participate in further growth in the company's equity value.

Question 70

Bond values can be derived by evaluating their yield,yield to maturity,call risk,yield to call,and coupon yield.

Question 71

Some bonds are traded on stock exchanges or in the over-the-counter market.