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Finance 321Chapter 10. Graded A

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Finance 321Chapter 10 True or False: Bondholders can earn income both from interest and from capital gains. True or False: The primary reasons for owning bonds are the income they provide and also ... the stability they bring to an investment portfolio. True or False: Over the period from late 2008 through 2012, the bond market outperformed the stock market. True or False: As investors approach retirement age, they should hold more bonds and less stock True or False: During the period 2008 through 2012, bonds performed poorly because of falling interest rates. True or False: Bond prices are stable over any five- to ten-year period. True or False: Bonds are typically a good investment choice for an individual who is seeking long-term preservation of capital. True or False: Corporate bonds are actively traded in the secondary markets. Which of the following are advantages of owning bonds? I. diversification properties II. higher long-term returns than equity holdings III. current income IV. relatively low risk When bonds are initially added to an all-equity portfolio the: The phenomenon known as "flight to quality" causes yields on government bond and corporate bonds: Which of the following types of risk affect bonds? I. call risk II. business risk III. purchasing power risk IV. liquidity risk The bond market is considered bearish when: Under normal economic conditions, the major source of risk faced by investors who purchase investment grade bonds is: In a severe recession, the major source of risk faced by investors who purchase corporate bonds is: When interest rates are falling, most of the return on bonds will come from Which type of risk is based on the financial integrity of a bond issuer? True or False: Each interest payment on a 6%, semi-annual bond is $60. True or False: Each interest payment on a 6%, semi-annual bond is $30. True or False: When a bond is called, the bondholder generally faces a rate of return that is lower than expected. True or False: The holder of a serial bond receives both semi-annual interest and principal payments over the life of the bond. True or False: The risk premium component of a bond's market interest rate is related to the characteristics of the particular bond and its issuer. True or False: Most bonds pay interest quarterly. True or False: Debt instruments with maturities of 2 to 10 years are known as notes. True or False: A bond which is noncallable for a period of time after which it is freely callable is called a deferred call bond. True or False: The initial call price of an 8% bond could be as high as $1,080 A single bond issue with multiple maturity dates is called a Debentures are secured by: A note is generally defined as debt with an initial term to maturity of: Under which bond provision is the issuer required to retire portions of the bond issue prior to maturity? Most bonds pay interest: A bond which has a deferred call: Bonds issued by stable sovereign governments such as the U.S. and the nations of Western Europe: When a bond's rating improves from A to AA: Which of the following statements about bond rating agencies is true? Lee is considering buying one of two newly-issued bonds. Bond A is a twenty-year, 7.5% coupon bond that is non-callable. Bond B is a twenty-year, 8.25% bond that is callable after two years. Both bonds are comparable in all other aspects. Lee plans on holding his bond to maturity. What should Lee do if he feels that interest rates are going to decline by 2% in the near future and then remain relatively stable thereafter? Which of the following is(are) senior bonds? I. equipment trust certificates II. mortgage bonds III. debentures IV. collateral trust bonds Which one of the following is the most junior in terms of its claim on earnings and assets? Bonds are least likely to be called if: they are selling at a substantial discount. Which of the following will tend to improve a bond's rating? I. an improvement in the firm's cash flow II. an increase in corporate debt III. an increase in net profits IV. an increase in net working capital Bonds with one of the top four ratings (Aaa through Baa, or AAA through BBB) are designated as: When the economy is moving toward a recession, the yield on riskier bonds will tend to: rise If a bond rating moves from a BB to a BBB rating: Which of the following factors are included in the rating analysis of a corporate bond? I. the issue's indenture provisions II. the liquidity position of the issuing company III. the issuing company's relative debt burden IV. the stability of the company's earnings True or False: When interest rates change, the prices of short-term bonds will change more than those of long-term bonds. True or False: Interest rates and bond prices are positively related. True or False: An increase in the market rate of interest can cause a bondholder to realize a capital loss on the sale of their bonds True or False: Fixed coupon rates cause bond yields to lag inflation rates when inflation rates begin to increase significantly. True or False: Issuers must redeem outstanding bonds for at least their par value. True or False: If you want to reduce the price volatility of your bond portfolio, you should shorten the time-to-maturity of your portfolio. True or False: If you feel interest rates are going to drop significantly, you could potentially realize large capital gains by purchasing long-term zero coupon bonds prior to the rates decreasing. True or False: Investment-grade bonds are more interest rate sensitive than junk bonds. Which one of the following variables has the greatest effect on bond prices? An increase in the market rate of return on an outstanding bond will: The Franklin Company issued a 6% bond three years ago at par value. The market interest rate on comparable bonds today is 5%. The Franklin Company bond currently pays ________ a year in interest and the bond sells at a ________. Solstice Corporation issued a 5% bond four years ago at par value. The market interest rate on comparable bonds today is 4%. Two years ago, Mathew purchased a 10 year government bond with a yield of 4.75%. Today, the interest rate on government bonds with 8 years to maturity is 3.5%. If Mathew sells his bond today, he most likely will: At the time you purchase a bond, you know the exact holding period return you will earn if: When the market rate of return exceeds the coupon rate, a bond will sell at: Which one of the following combination of features causes bond prices to be the most volatile? Bob expects to retire in a few years and his primary goal is to avoid major losses in his 401-K account. Which of the following bond characteristics should he be seeking? I. long maturities II. high ratings III high yields IV. short maturities If you expect market interest rates to rise, you should purchase: A bond quoted at a price of 101.2: True or false A debenture is secured only by the issuer's promise to repay the debt. True or False: The par value of a Treasury inflation-indexed obligation is established as $1,000 over the life of the bond. True or false: In an inflationary environment, the interest payments on Treasury inflation-indexed obligations increase over time. True or false: If the inflation rate is 2%, the principal of a Treasury inflation protection security will from $1,000 to $1,020. True or false: If you hold a zero-coupon bond to maturity, the fully compounded rate of return is virtually guaranteed to be equal to the rate stated at the time the bond was purchased. True or false: Zero coupon bonds have very limited price volatility. True or false: Mortgage-backed bonds are issued primarily by state governments and are secured by home mortgages. True or false: Mortgage-backed securities are self-liquidating. True or false: Collateralized mortgage obligations are relatively low risk investments True or false: The various CMO tranches can have significantly different degrees of prepayment risk. True or false: CMO tranches are structured to create long, intermediate and short-term securities. Which one of the following statements concerning Treasury bonds is correct? Which of the following statements about U.S. Treasury bonds are true? I. They are backed by the "full faith and credit" of the U.S. government. II. They are all indexed and adjusted for inflation. III. They trade in a very thin market. IV. They are traded in both U.S. and foreign markets. Debt securities issued by the Federal Home Loan Bank, the Student Loan Marketing Association and the Government National Mortgage Association are known as: Which of the following statements concerning mortgage backed securities are correct? I. They are secured by a pool of residential mortgages. II. A portion of the income stream is a non-taxable return of capital. III. They are backed by the full faith and credit of the U.S. government. IV. Their maturity depends on prepayments of the mortgages in the pool. Municipal bonds can be either general obligation bonds or revenue bonds. Of these two types of municipal bonds, only general obligation bonds: are backed by the full faith and credit of the issuer. Which of the following statements are correct concerning municipal bonds? I. Yields on municipal bonds are usually lower than yields on Treasury bonds. II. Municipal bonds are most appealing to individuals with high incomes. III. Interest on a municipal bond is exempt from federal income tax. IV. Municipal bonds are less risky than Treasury bonds. Kayla is in the 28% federal income tax bracket and the 5% state income tax bracket. If Jennifer purchases a municipal bond yielding 4.25%, what is the equivalent yield on a taxable bond if the municipal bond income is exempt from both federal and state taxes? What is the tax-equivalent yield of a double tax-free 5% municipal bond if the investor is in the 28% federal and 7% state tax brackets? Which one of the following statements concerning the tax treatment of municipal bonds is correct? The denomination of most corporate bonds is ________ and the maturities generally range from ________. Which of the following statements concerning equipment trust certificates are correct? I. Equipment trust certificates are typically used to raise funds for purchasing airplanes and railroad engines. II. Equipment trust certificates are usually issued with a single maturity date. III. Equipment trust certificates normally mature in 20 to 30 years. IV. Equipment trust certificates generally offer above-average yields. Which one of the following statements correctly describes the unique feature of GNMA pass-through securities? Which one of the following statements correctly describes the major drawback of a zero-coupon bond? Treasury strip bonds are popular because: I. they are high-quality bonds. II. they have a wide range of maturities. III. they are very liquid. IV. their income is not taxed until the bonds mature. One of the major problems associated with mortgage-backed securities is that: Which of the following characteristics apply to collateralized mortgage obligations? I. All bondholders receive a pro-rata share of all interest payments. II. CMOs are derivative securities created from mortgage-backed bonds. III. All principal payments are paid to the shortest remaining tranche. IV. CMOs have definite maturity dates for each tranche. The practice of bundling mortgages or other types of loans into pools and selling pieces of the pool as bond-like instruments to investors is known as: Collateralized mortgage obligations are relatively safe investments EXCEPT: Pass-through securities backed by pools of auto loans, credit card bills, and computer leases are known as The practice of bundling mortgages or other loans into pools and selling shares of the pool as bond-like instruments is known as The first tranche of a collateralized mortgage obligation has Which of the following statements are correct in respect to high-yield bonds? I. They are junk bonds with highly unpredictable rates of return. II. The issuing corporation usually has an excessive amount of debt. III. They possess a high level of default and market risk. IV. They are often subordinated debentures. PIK-bonds: initially pay interest payments in the form of additional debt. True or false: The biggest risk with foreign bonds is the risk of default. True or false: Foreign companies sometimes issue bonds which pay interest and principal in U. S. dollars. True or false: After the U. S. dollar, bonds denominated in euros are the largest segment of the global bond market. True or false: Yankee bonds are issued by the U.S. government, but sold only to foreign investors True or false: An American investor who holds euro-denominated bonds will profit if the euro weakens against the dollar One type of foreign bond that carries no currency exchange rate risk for a U.S. investor is a: Which one of the following statements concerning a global view of the bond market is correct? A type of bond that is issued and traded outside the United States and which is denominated in U.S. dollars but is not registered with the SEC is: Which of the following statements are correct concerning Eurodollar bonds? I. Initial offerings of Eurodollar bonds are sold in U.S. bond markets. II. Eurodollar bonds are denominated in dollars. III. The Eurodollar market is dominated by foreign-based investors. IV. Eurodollar bonds originate outside the United States. Eurodollar bonds are: In general, foreign-pay bonds provide ________ rates of return and ________ diversification effects for U.S. investors. True or false: When the call price of a convertible bond stock exceeds the conversion value of the bond, the issuing company is likely to force conversion by calling the bonds. True or false: The coupon rate on convertible bonds is usually higher than the coupon rate on equivalent bonds that are not convertible. True or false: The conversion ratio denotes the number of shares for which a convertible bond can be exchanged True or false: Convertible bonds will retain their value as bonds even if stock prices are falling. True or false: LYON's or liquid yield option notes are a type of convertible security. When convertible bonds are first issued: I. the conversion price of the stock is higher than the market price. II. the market price of the stock is higher than the conversion price. III. the coupon rate is higher than if the bond were not convertible. IV. the coupon rate is lower than if the bond were not convertible. Which of the following is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price. The stock does not pay a dividend. Bonhomme Co. issued $1,000 par value bonds with a 6% coupon rate, convertible into 25 share of Bonhomme common stock. When the bonds were issued the stock traded at $25 per share. The stock is now at $42 per share and pays a $0.10 per share annual dividend. In the near future When convertible bonds are first issued: I. the conversion price of the stock is higher than the market price. II. the market price of the stock is higher than the conversion price. III. the coupon rate is higher than if the bond were not convertible. IV. the coupon rate is lower than if the bond were not convertible. Liquid yield option notes or LYONS have which of the following characteristics? I. convertibility at a fixed conversion ratio II. high coupon rates III. a put feature that guarantees the right to redeem the bonds at a prespecified price IV. convertibility at a fixed conversion price Which of the following is a good reason to invest in convertible bonds? They offer predictable income and a chance to profit from an increase in the stock price. [Show More]

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