Liberty University BUSI 321 test 2 exam solutions answers right
How many versions: 6 different versions
Question 1 Some bonds are "stripped," which means that
Question 2 Which of the following is not an example of a municipal bond?
Question 3 For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.
Question 4 (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.
Question 5 Bonds issued by ____ are backed by the federal government.
Question 6 A call provision on bonds normally
Question 7 Which of the following statements is true regarding STRIPS?
Question 8 Which of the following is not mentioned in your text as a protective covenant?
Question 9 A tenyear, inflationindexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.
Question 10 The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.
Question 11 Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.
Question 12 The bonds that are most sensitive to interest rate movements have
Question 13 Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.
Question 14 If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
Question 15 As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)
Question 16 When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly:
Question 17 Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.
Question 18 Which of the following is not true with respect to a growingequity mortgage?
Question 19 A(n) _________ problem occurs when a person or institution does not have to bear the full consequence of its behavior and therefore assumes more risk than it otherwise would.
Question 20 Collateralized mortgage obligations (CMOs) are generally perceived to have
Question 21 Use an amortization schedule. A 15year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
Question 22 A mortgage with low initial payments that increase over time without ever leveling off is a
Question 23 Financial institutions that hold fixedrate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from shortterm customer deposits to make longterm mortgage loans.
Question 24 In an amortization schedule of monthly mortgage payments
Question 25 A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on.
Question 26 A firm whose stock price has risen:
Question 27 Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively
Question 28 Which of the following is not a form of shareholder activism?
Question 29 Which of the following is not true regarding the SarbanesOxley Act?
Question 30 Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share.
Question 31 When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as
Question 32 Which of the following is not a provision specified in the SarbanesOxley Act?
Question 33 Which of the following is not a barrier to corporate control?
Question 34 Which of the following statements is incorrect?
Question 35 The general mood of investors represents:
Question 36 ____ is (are) not a firmspecific factor(s) that affect(s) stock prices.
Question 37 Steam Corp. has a beta of 1.5. The prevailing riskfree rate is 5 percent and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.
Question 38 If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome.
Question 39 The formula for a stock portfolio's volatility does not contain the
Question 40 Stock X has a lower beta than Stock Y. The market return for next month is expected to be either −1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is
Question 41 The January effect refers to the ____ pressure on ____ stocks in January of every year.
Question 42 Sorvino Co. is expected to offer a dividend of $3.2 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.
Question 43 Shortselling a stock refers to
Question 44 Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be ____ percent.
Question 45 Which of the following statements is incorrect with respect to the structure of the SEC?
Question 46 Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock?
Question 47 The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities.
Question 48 When investors buy stock with borrowed funds, this is sometimes referred to as
Question 49 Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year?
Question 50 The risk of a short sale is that the stock price
1. Securities with maturities of one year or less are classified as
a.
|
capital market instruments.
|
b.
|
money market instruments.
|
c.
|
preferred stock.
|
d.
|
none of the above
|
2. Which of the following is not a money market security?
a.
|
Treasury bill
|
b.
|
negotiable certificate of deposit
|
c.
|
common stock
|
d.
|
federal funds
|
3. ____ are sold at an auction at a discount from par value.
a.
|
Treasury bills
|
b.
|
Repurchase agreements
|
c.
|
Banker's acceptances
|
d.
|
Commercial paper
|
4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?
a.
|
13.43 percent
|
b.
|
2.78 percent
|
c.
|
10.55 percent
|
d.
|
2.80 percent
|
e.
|
none of the above
|
5. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?
a.
|
about 13.4 percent
|
b.
|
about 12.5 percent
|
c.
|
about 11.3 percent
|
d.
|
about 11.6 percent
|
e.
|
about 10.7 percent
|
6. An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?
a.
|
about 10.1 percent
|
b.
|
about 12.6 percent
|
c.
|
about 11.4 percent
|
d.
|
about 13.5 percent
|
e.
|
about 14.3 percent
|
7. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.
a.
|
10,000
|
b.
|
9,524
|
c.
|
9,756
|
d.
|
none of the above
|
8. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?
a.
|
10.26 percent
|
b.
|
0.26 percent
|
c.
|
$2,500
|
d.
|
10.00 percent
|
e.
|
11.00 percent
|
9. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.
a.
|
competitive
|
b.
|
noncompetitive
|
c.
|
very small
|
d.
|
none of the above
|
10. At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
a.
|
slightly less than
|
b.
|
slightly higher than
|
c.
|
equal to
|
d.
|
A and B both occur with about equal frequency
|
11. T-bills and commercial paper are sold
a.
|
with a stated coupon rate.
|
b.
|
at a discount from par value.
|
c.
|
at a premium about par value.
|
d.
|
A and C
|
e.
|
none of the above
|
12. ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.
a.
|
A banker's acceptance
|
b.
|
A repurchase agreement
|
c.
|
Commercial paper
|
d.
|
A Treasury bill
|
13. Commercial paper has a maximum maturity of ____ days.
a.
|
45
|
b.
|
270
|
c.
|
360
|
d.
|
none of the above
|
14. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?
a.
|
8.62 percent
|
b.
|
8.78 percent
|
c.
|
8.90 percent
|
d.
|
9.14 percent
|
e.
|
9.00 percent
|
15. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?
a.
|
12.12 percent
|
b.
|
11.11 percent
|
c.
|
13.00 percent
|
d.
|
14.08 percent
|
e.
|
15.25 percent
|
16. When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.
a.
|
higher; higher
|
b.
|
lower; lower
|
c.
|
A and B
|
d.
|
none of the above
|
17. Which of the following is not a money market instrument?
a.
|
banker's acceptance
|
b.
|
commercial paper
|
c.
|
negotiable CDs
|
d.
|
repurchase agreements
|
e.
|
all of the above are money market instruments
|
18. A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?
a.
|
9.43 percent
|
b.
|
9.28 percent
|
c.
|
9.14 percent
|
d.
|
9.00 percent
|
19. The federal funds market allows depository institutions to borrow
a.
|
short-term funds from each other.
|
b.
|
short-term funds from the Treasury.
|
c.
|
long-term funds from each other.
|
d.
|
long-term funds from the Federal Reserve.
|
e.
|
B and D
|
20. When a bank guarantees a future payment to a firm, the financial instrument used is called
a.
|
a repurchase agreement.
|
b.
|
a negotiable CD.
|
c.
|
a banker's acceptance.
|
d.
|
commercial paper.
|
21. Which of the following instruments has a highly active secondary market?
a.
|
banker's acceptances
|
b.
|
commercial paper
|
c.
|
federal funds
|
d.
|
repurchase agreements
|
22. Which of the following is true of money market instruments?
a.
|
Their yields are highly correlated over time.
|
b.
|
They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
|
c.
|
Treasury bills have the highest yield.
|
d.
|
They all make periodic coupon (interest) payments.
|
e.
|
A and B
|
23. An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is
a.
|
2.0 percent.
|
b.
|
5.10 percent.
|
c.
|
5.00 percent.
|
d.
|
2.04 percent.
|
24. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.
a.
|
3.10
|
b.
|
0.77
|
c.
|
1.00
|
d.
|
none of the above
|
25. The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
a.
|
federal funds rate
|
b.
|
discount rate
|
c.
|
prime rate
|
d.
|
repo rate
|
26. ____ are the most active participants in the federal funds market.
a.
|
Savings and loan associations
|
b.
|
Securities firms
|
c.
|
Credit unions
|
d.
|
Commercial banks
|
27. Eurodollar deposits
a.
|
are U.S. dollars deposited in the U.S. by European investors.
|
b.
|
are subject to interest rate ceilings.
|
c.
|
have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States).
|
d.
|
are not subject to reserve requirements.
|
28. Which money market transaction is most likely to represent a loan from one commercial bank to another?
a.
|
banker's acceptance
|
b.
|
negotiable CD
|
c.
|
federal funds
|
d.
|
commercial paper
|
29. The rate on Eurodollar floating rate CDs is based on
a.
|
a weighted average of European prime rates.
|
b.
|
the London Interbank Offer Rate.
|
c.
|
the U.S. prime rate.
|
d.
|
a weighted average of European discount rates.
|
30. Treasury bills
a.
|
have a maturity of up to five years.
|
b.
|
have an active secondary market.
|
c.
|
are commonly sold at par value.
|
d.
|
commonly offer coupon payments.
|
31. The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
a.
|
greater than; recessionary
|
b.
|
greater than; boom economy
|
c.
|
less than; boom economy
|
d.
|
less than; recessionary
|
32. The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
a.
|
greater than; recessionary
|
b.
|
greater than; boom economy
|
c.
|
less than; boom economy
|
d.
|
less than; recessionary
|
33. Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?
a.
|
NCDs
|
b.
|
retail CDs
|
c.
|
commercial paper
|
d.
|
federal funds
|
34. The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be
a.
|
eliminated.
|
b.
|
reduced.
|
c.
|
increased.
|
d.
|
unchanged (there is no effect).
|
35. The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.
a.
|
increased
|
b.
|
reduced
|
c.
|
always negative
|
d.
|
unaffected
|
36. The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.
a.
|
increased
|
b.
|
reduced
|
c.
|
always negative
|
d.
|
unaffected
|
37. Treasury bills are sold through ____ when initially issued.
a.
|
insurance companies
|
b.
|
commercial paper dealers
|
c.
|
auction
|
d.
|
finance companies
|
38. At a given point in time, the actual price paid for a three-month Treasury bill is
a.
|
usually equal to the par value.
|
b.
|
more than the price paid for a six-month Treasury bill.
|
c.
|
equal to the price paid for a six-month Treasury bill.
|
d.
|
none of the above
|
39. The minimum denomination of commercial paper is
a.
|
$25,000.
|
b.
|
$100,000.
|
c.
|
$150,000.
|
d.
|
$200,000.
|
40. Commercial paper is
a.
|
always directly placed with investors.
|
b.
|
always placed with the help of commercial paper dealers.
|
c.
|
placed either directly or with the help of commercial paper dealers.
|
d.
|
always placed by bank holding companies.
|
41. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.
a.
|
6.02
|
b.
|
1.54
|
c.
|
1.50
|
d.
|
6.20
|
e.
|
none of the above
|
42. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.
a.
|
5.93
|
b.
|
6.12
|
c.
|
6.20
|
d.
|
6.02
|
e.
|
none of the above
|
43. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?
a.
|
25.00 percent
|
b.
|
35.41 percent
|
c.
|
14.59 percent
|
d.
|
none of the above
|
44. An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities.
a.
|
upward; upward
|
b.
|
downward; downward
|
c.
|
upward; downward
|
d.
|
downward; upward
|
45. Which of the following statements is incorrect with respect to the federal funds rate?
a.
|
It is the rate charged by financial institutions on loans they extend to each other.
|
b.
|
It is not influenced by the supply and demand for funds in the federal funds market.
|
c.
|
The federal funds rate is closely monitored by all types of firms.
|
d.
|
Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates.
|
e.
|
The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
|
46. Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.
a.
|
7.08
|
b.
|
6.95
|
c.
|
6.99
|
d.
|
7.04
|
e.
|
none of the above
|
47. Commercial paper is subject to:
a.
|
interest rate risk.
|
b.
|
default risk.
|
c.
|
A and B.
|
d.
|
none of the above.
|
48. If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities.
a.
|
weak; downward
|
b.
|
weak; upward
|
c.
|
strong; upward
|
d.
|
none of the above
|
49. In general the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information.
a. True
b. False
50. Money market securities are must have a maturity of three months or less.
a. True
b. False
51. Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.
a. True
b. False
52. An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.
a. True
b. False
53. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London interbank offer rate (LIBOR).
a. True
b. False
54. Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.
a. True
b. False
55. Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.
a. True
b. False
56. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.
a. True
b. False
57. T-bills do not offer coupon payments but are sold at a discount from par value.
a. True
b. False
58. Junk commercial paper is commercial paper that is not rated or rated low.
a. True
b. False
59. A line of credit provided by a commercial bank allows a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.
a. True
b. False
60. T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.
a. True
b. False
61. Most repo transactions use government securities.
a. True
b. False
62. Exporters can hold a banker's acceptance until the date at which payment is to be made, yet they frequently sell the acceptance before then at a discount to obtain cash immediately.
a. True
b. False
63. Money market security values are less sensitive to interest rate movements than bonds.
a. True
b. False
64. During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.
a. True
b. False
65. The price noncompetitive bidders will pay at a Treasury bill auction is the
a.
|
highest price entered by a competitive bidder.
|
b.
|
highest price entered by a noncompetitive bidder.
|
c.
|
weighted average price paid by all competitive bidders whose bids were accepted.
|
d.
|
equally weighted average price paid by all competitive bidders whose bids were accepted.
|
e.
|
none of the above
|
66. Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent.
a.
|
6.02
|
b.
|
1.54
|
c.
|
1.50
|
d.
|
6.20
|
e.
|
none of the above
|
67. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent.
a.
|
5.93
|
b.
|
6.12
|
c.
|
6.20
|
d.
|
6.02
|
e.
|
none of the above
|
68. A ____ is not a money market security.
a.
|
Treasury bill
|
b.
|
negotiable certificate of deposit
|
c.
|
bond
|
d.
|
banker's acceptance
|
e.
|
All of the above are money market securities.
|
69. Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.
a.
|
14.39
|
b.
|
14.13
|
c.
|
14.59
|
d.
|
14.33
|
e.
|
none of the above
|
70. When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated.
a.
|
higher; higher
|
b.
|
lower; lower
|
c.
|
higher; lower
|
d.
|
lower; higher
|
e.
|
Answers C and D are correct.
|
71. Which of the following securities is most likely to be used in a repo transaction?
a.
|
commercial paper
|
b.
|
certificate of deposit
|
c.
|
Treasury bill
|
d.
|
common stock
|
e.
|
All of the above are equally likely to be used in a repo transaction.
|
1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.
a.
|
Bearer
|
b.
|
Registered
|
c.
|
Treasury
|
d.
|
Corporate
|
2. The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.
a. True
b. False
3. Note maturities are usually ____, while bond maturities are ____.
a.
|
less than 10 years; 10 years or more
|
b.
|
10 years or more; less than 10 years
|
c.
|
less than 5 years; 5 years or more
|
d.
|
5 years or more; less than 5 years
|
4. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a.
|
annual
|
b.
|
semiannual
|
c.
|
quarterly
|
d.
|
monthly
|
5. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
a.
|
50
|
b.
|
70
|
c.
|
10
|
d.
|
5
|
6. Interest earned from Treasury bonds is
a.
|
exempt from all income tax.
|
b.
|
exempt from federal income tax.
|
c.
|
exempt from state and local taxes.
|
d.
|
subject to all income taxes.
|
7. Treasury bond auctions are normally conducted only at the beginning of each year.
a. True
b. False
8. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.
a.
|
Competitive
|
b.
|
Noncompetitive
|
c.
|
Negotiable
|
d.
|
Non-negotiable
|
9. Treasury bond dealers
a.
|
quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
|
b.
|
profit from a very wide spread between bid and ask prices in the Treasury securities market.
|
c.
|
may trade Treasury bonds among themselves.
|
d.
|
make a primary market for Treasury bonds.
|
10. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.
a. True
b. False
11. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.
a.
|
250
|
b.
|
255
|
c.
|
500
|
d.
|
510
|
12. Bonds issued by ____ are backed by the federal government.
a.
|
the Treasury
|
b.
|
AAA-rated corporations
|
c.
|
state governments
|
d.
|
city governments
|
13. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a.
|
supported by the municipal government's ability to tax; supported by the municipal government's ability to tax
|
b.
|
supported by the municipal government's ability to tax; supported by revenue generated from the project
|
c.
|
always subject to federal taxes; always exempt from state and local taxes
|
d.
|
typically zero-coupon bonds; typically zero-coupon bonds
|
14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.
a.
|
remain unchanged
|
b.
|
fall
|
c.
|
rise
|
d.
|
none of the above
|
15. Which of the following statements is not true regarding zero-coupon bonds?
a.
|
They are issued at a deep discount from par value.
|
b.
|
Investors are taxed on the total amount of interest earned at maturity.
|
c.
|
The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity.
|
d.
|
Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts.
|
e.
|
All of the above are true.
|
16. A variable rate bond allows
a.
|
investors to benefit from declining rates over time.
|
b.
|
issuers to benefit from rising market interest rates over time.
|
c.
|
investors to benefit from rising market interest rates over time.
|
d.
|
none of the above.
|
17. Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.
a.
|
higher; lower
|
b.
|
lower; lower
|
c.
|
higher; higher
|
d.
|
none of the above
|
18. A private bond placement has to be registered with the SEC.
a. True
b. False
19. Which of the following institutions is most likely to purchase a private bond placement?
a.
|
commercial bank
|
b.
|
mutual fund
|
c.
|
insurance company
|
d.
|
savings institution
|
20. A protective covenant may
a.
|
specify all the rights and obligations of the issuing firm and the bondholders.
|
b.
|
require the firm to retire a certain amount of the bond issue each year.
|
c.
|
restrict the amount of additional debt the firm can issue.
|
d.
|
none of the above
|
21. A call provision on bonds normally
a.
|
allows the firm to sell new bonds at par value.
|
b.
|
gives the firm to sell new bonds above market value.
|
c.
|
allows the firm to sell bonds to the Treasury.
|
d.
|
allows the firm to buy back bonds that it previously issued.
|
22. When would a firm most likely call bonds?
a.
|
after interest rates have declined
|
b.
|
if interest rates do not change
|
c.
|
after interest rates increase
|
d.
|
just before the time at which interest rates are expected to decline
|
23. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in
a.
|
dollars.
|
b.
|
euros and making payments from U.S. headquarters.
|
c.
|
euros and making payments from its German subsidiary.
|
d.
|
dollars and making payments from its German subsidiary.
|
24. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.
a. True
b. False
25. Bonds that are not secured by specific property are called
a.
|
a chattel mortgage.
|
b.
|
open-end mortgage bonds.
|
c.
|
debentures.
|
d.
|
blanket mortgage bonds.
|
26. Bonds that are secured by personal property are called
a.
|
chattel mortgage bonds.
|
b.
|
first mortgage bonds.
|
c.
|
second mortgage bonds.
|
d.
|
debentures.
|
27. The coupon rate of most variable-rate bonds is tied to
a.
|
the prime rate.
|
b.
|
the discount rate.
|
c.
|
LIBOR.
|
d.
|
the federal funds rate.
|
28. Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.
a.
|
rise
|
b.
|
decline
|
c.
|
be zero
|
d.
|
be unaffected
|
29. During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods.
a. True
b. False
30. ____ bonds have the most active secondary market.
a.
|
Treasury
|
b.
|
Zero-coupon corporate
|
c.
|
Junk
|
d.
|
Municipal
|
31. Some bonds are "stripped," which means that
a.
|
they have defaulted.
|
b.
|
the call provision has been eliminated.
|
c.
|
they are transferred into principal-only and interest-only securities.
|
d.
|
their maturities have been reduced.
|
32. ____ are not primary purchasers of bonds.
a.
|
Insurance companies
|
b.
|
Finance companies
|
c.
|
Mutual funds
|
d.
|
Pension funds
|
33. Leveraged buyouts are commonly financed by the issuance of:
a.
|
money market securities.
|
b.
|
Treasury bonds.
|
c.
|
corporate bonds.
|
d.
|
municipal bonds.
|
34. When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.
a.
|
auction-rate securities
|
b.
|
structured notes
|
c.
|
leveraged notes
|
d.
|
stripped securities
|
35. Which of the following statements is true regarding STRIPS?
a.
|
they are issued by the Treasury
|
b.
|
they are created and sold by various financial institutions
|
c.
|
they are not backed by the U.S. government
|
d.
|
they have to be held until maturity
|
e.
|
all of the above are true regarding STRIPS
|
36. (Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.
a.
|
9.33
|
b.
|
7.84
|
c.
|
9.00
|
d.
|
none of the above
|
37. (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.
a.
|
9.96
|
b.
|
10.00
|
c.
|
10.33
|
d.
|
10.24
|
e.
|
none of the above
|
38. Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a.
|
12
|
b.
|
9
|
c.
|
10.5
|
d.
|
more information is needed to answer this question
|
39. Which of the following is not true regarding zero-coupon bonds?
a.
|
They are issued at a deep discount from par value.
|
b.
|
Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.
|
c.
|
The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest.
|
d.
|
Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts.
|
e.
|
all of the above are true
|
40. Which of the following is not true regarding the call provision?
a.
|
It typically requires a firm to pay a price above par value when it calls its bonds.
|
b.
|
The difference between the market value of the bond and the par value is called the call premium.
|
c.
|
A principal use of the call provision is to lower future interest payments.
|
d.
|
A principal use of the call provision is to retire bonds as required by a sinking-fund provision.
|
e.
|
A call provision is normally viewed as a disadvantage to bondholders.
|
41. If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.
a.
|
decline; more
|
b.
|
decline; less
|
c.
|
increase; more
|
d.
|
none of the above
|
42. Which of the following would not be a likely example of a protective covenant provision?
a.
|
a limit on the amount of dividends a firm can pay
|
b.
|
a limit on the corporate officers' salaries a firm can pay
|
c.
|
the amount of additional debt a firm can issue
|
d.
|
a call feature
|
43. Bonds are issued in the primary market through a telecommunications network.
a. True
b. False
44. Corporate bonds can be placed with investors through a public offering or a private placement.
a. True
b. False
45. When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies.
a. True
b. False
46. Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC.
a. True
b. False
47. Rule 144A creates liquidity for securities that are privately placed.
a. True
b. False
48. Corporate bonds are more standardized than stocks.
a. True
b. False
49. Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions.
a. True
b. False
50. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.
a. True
b. False
51. The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
a. True
b. False
52. Bond dealers do not have an inventory of bonds.
a. True
b. False
53. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.
a. True
b. False
54. Many bonds are listed on the New York Stock Exchange (NYSE).
a. True
b. False
55. The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies.
a. True
b. False
56. The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more.
a. True
b. False
57. Treasury bonds are issued by state and local governments.
a. True
b. False
58. Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only.
a. True
b. False
59. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.
a. True
b. False
60. Savings bonds are bonds issued by the Federal Reserve.
a. True
b. False
61. Corporate bonds usually pay interest on an annual basis.
a. True
b. False
62. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.
a. True
b. False
63. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.
a. True
b. False
64. Subordinated indentures are debentures that have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures.
a. True
b. False
65. High-risk bonds are called trash bonds.
a. True
b. False
66. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.
a. True
b. False
67. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.
a. True
b. False
68. Which of the following statements is not true regarding STRIPS?
a.
|
They are not issued by the Treasury.
|
b.
|
They are created and sold by various financial institutions.
|
c.
|
They are backed by the U.S. government.
|
d.
|
They have to be held until maturity.
|
e.
|
All of the above are true regarding STRIPS.
|
69. (Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____ percent.
a.
|
9.33
|
b.
|
7.84
|
c.
|
9.00
|
d.
|
none of the above
|
70. (Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent.
a.
|
9.96
|
b.
|
10.00
|
c.
|
10.33
|
d.
|
10.24
|
e.
|
none of the above
|
71. Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a.
|
12.00
|
b.
|
9.00
|
c.
|
10.50
|
d.
|
More information is needed to answer this question.
|
72. Which of the following is not an example of a municipal bond?
a.
|
general obligation bond
|
b.
|
revenue bond
|
c.
|
Treasury bond
|
d.
|
All of the above are examples of municipal bonds.
|
73. Which of the following statements is incorrect?
a.
|
The municipal bond must pay a risk premium to compensate for the possibility of default risk.
|
b.
|
The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
|
c.
|
The income earned from municipal bonds is exempt from federal taxes.
|
d.
|
All of the above are true.
|
74. Which of the following is not mentioned in your text as a protective covenant?
a.
|
a limit on the amount of dividends a firm can pay
|
b.
|
a limit on the corporate officers' salaries a firm can pay
|
c.
|
the amount of additional debt a firm can issue
|
d.
|
the appointment of a trustee in all bond indentures
|
e.
|
All of the above are mentioned in the text as protective covenants.
|
75. Everything else being equal, which of the following bond ratings is associated with the highest yield?
a.
|
Baa
|
b.
|
A
|
c.
|
Aa
|
d.
|
Aaa
|
76. A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.
a.
|
first mortgage bond; second mortgage bond
|
b.
|
first mortgage bond; debenture
|
c.
|
first mortgage bond; subordinated debenture
|
d.
|
chattel mortgage bond; subordinated debenture
|
e.
|
none of the above
|
77. If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.
a.
|
more; less; lower
|
b.
|
more; less; higher
|
c.
|
less; more; higher
|
d.
|
none of the above
|
1. The appropriate discount rate for valuing any bond is the
a.
|
bond's coupon rate.
|
b.
|
bond's coupon rate adjusted for the expected inflation rate over the life of the bond.
|
c.
|
Treasury bill rate with an adjustment to include a risk premium if one exists.
|
d.
|
yield that could be earned on alternative investments with similar risk and maturity.
|
2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities.
a.
|
more difficult than
|
b.
|
easier than
|
c.
|
just as difficult as
|
d.
|
none of the above
|
3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?
a.
|
$1,069.31
|
b.
|
$1,000.00
|
c.
|
$9712
|
d.
|
$927.66
|
e.
|
none of the above
|
4. A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?
a.
|
$1,021
|
b.
|
$1,000
|
c.
|
$981
|
d.
|
$951
|
e.
|
none of the above
|
5. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.
a.
|
1,302
|
b.
|
763
|
c.
|
761
|
d.
|
1,299
|
6. From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.
a.
|
high yield; appreciates
|
b.
|
high yield; remains stable
|
c.
|
low yield; appreciates
|
d.
|
low yield; depreciates
|
7. The value of ____-risk securities will be relatively ____.
a.
|
high; high
|
b.
|
high; low
|
c.
|
low; low
|
d.
|
none of the above
|
8. The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.
a.
|
discount rate; required rate of return; discount
|
b.
|
required rate of return; discount rate; discount
|
c.
|
required rate of return; discount rate; premium
|
d.
|
none of the above
|
9. If the coupon rate equals the required rate of return, the price of the bond
a.
|
should be above its par value.
|
b.
|
should be below its par value.
|
c.
|
should be equal to its par value.
|
d.
|
is negligible.
|
10. When financial institutions expect interest rates to ____, they may ____.
a.
|
increase; sell bonds and buy short-term securities
|
b.
|
increase; sell short-term securities and buy bonds
|
c.
|
decrease; sell bonds and buy short-term securities
|
d.
|
B and C
|
11. For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the
a.
|
greater is the premium on the price.
|
b.
|
greater is the discount on the price.
|
c.
|
smaller is the premium on the price.
|
d.
|
smaller is the discount on the price.
|
12. Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?
a.
|
$363,212
|
b.
|
$385,500
|
c.
|
$422,400
|
d.
|
$424,100
|
e.
|
none of the above
|
13. If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
a.
|
equals; equals
|
b.
|
exceeds; is less than
|
c.
|
is less than; is greater than
|
d.
|
B and C
|
e.
|
none of the above
|
14. As interest rates increase, long-term bond prices
a.
|
increase by a greater degree than short-term bond prices.
|
b.
|
increase by an equal degree as short-term bond prices.
|
c.
|
decrease by a greater degree than short-term bond prices.
|
d.
|
decrease by an equal degree as short-term bond prices.
|
e.
|
decrease by a smaller degree than short-term bond prices.
|
15. The prices of bonds with ____ are most sensitive to interest rate movements.
a.
|
high coupon payments
|
b.
|
zero coupon payments
|
c.
|
small coupon payments
|
d.
|
none of the above (The size of the coupon payment does not affect sensitivity of bond prices to interest rate movements.)
|
16. A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
a.
|
increase; upward
|
b.
|
increase; downward
|
c.
|
decrease; downward
|
d.
|
none of the above
|
17. Other things held constant, bond prices should increase when inflationary expectations rise.
a. True
b. False
18. An expected ____ in economic growth places ____ pressure on bond prices.
a.
|
increase; downward
|
b.
|
increase; upward
|
c.
|
decrease; downward
|
d.
|
none of the above
|
19. Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?
a.
|
-.980
|
b.
|
+.980
|
c.
|
-.494
|
d.
|
+.494
|
e.
|
none of the above
|
20. If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.
a.
|
high coupon bonds; more favorably affected by declining interest rates
|
b.
|
zero or low coupon bonds; more favorably affected by declining interest rates
|
c.
|
zero or low coupon bonds; more favorably affected by rising interest rates
|
d.
|
high coupon bonds; completely insulated from rising interest rates
|
21. The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return.
a.
|
low; short
|
b.
|
low; long
|
c.
|
high; short
|
d.
|
high; long
|
22. An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?
a.
|
$52,115,093
|
b.
|
$55,341,216
|
c.
|
$55,000,000
|
d.
|
$56,935,022
|
23. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?
a.
|
13 percent
|
b.
|
12 percent
|
c.
|
11 percent
|
d.
|
10 percent
|
24. A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in two years, and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?
a.
|
$24,113,418
|
b.
|
$24,667,230
|
c.
|
$25,000,000
|
d.
|
$25,891,632
|
25. The price of short-term bonds are commonly ____ those of long-term bonds.
a.
|
more volatile than
|
b.
|
equally volatile as
|
c.
|
less volatile than
|
d.
|
A and C occur with about equal frequency
|
26. Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities.
a.
|
greater; more
|
b.
|
greater; equally
|
c.
|
greater; less
|
d.
|
less; equally
|
e.
|
B and D
|
27. As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)
a.
|
consistently increase
|
b.
|
consistently decrease
|
c.
|
remain unchanged
|
d.
|
change in a direction that cannot be determined with the above information
|
28. As interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)
a.
|
consistently increase
|
b.
|
consistently decrease
|
c.
|
remain unchanged
|
d.
|
change in a direction that cannot be determined with the above information
|
29. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.
a.
|
increase; increase
|
b.
|
increase; decrease
|
c.
|
decrease; decrease
|
d.
|
decrease; increase
|
30. If analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____.
a.
|
increase; increase
|
b.
|
increase; decrease
|
c.
|
decrease; decrease
|
d.
|
decrease; increase
|
31. Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.
a.
|
above; above
|
b.
|
above; below
|
c.
|
below; below
|
d.
|
below; above
|
32. Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.
a.
|
above; above
|
b.
|
above; below
|
c.
|
below; below
|
d.
|
below; above
|
33. If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a.
|
increase; increase
|
b.
|
increase; decrease
|
c.
|
decrease; decrease
|
d.
|
decrease; increase
|
34. If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a.
|
increase; increase
|
b.
|
increase; decrease
|
c.
|
decrease; decrease
|
d.
|
decrease; increase
|
35. Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)
a.
|
reduced Treasury borrowing along with anticipation that money supply growth will decrease
|
b.
|
reduced Treasury borrowing along with anticipation that money supply growth will increase
|
c.
|
an anticipated drop in money supply growth along with increasing Treasury borrowing
|
d.
|
higher levels of Treasury borrowing and corporate borrowing
|
36. If the United States announces that it will borrow an additional $10 billion, this announcement will normally cause the bond traders to expect
a.
|
higher interest rates in the future, and will buy bonds now.
|
b.
|
higher interest rates in the future, and will sell bonds now.
|
c.
|
stable interest rates in the future, and will buy bonds now.
|
d.
|
lower interest rates in the future, and will buy bonds now.
|
e.
|
lower interest rates in the future, and will sell bonds now.
|
37. The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.
a.
|
slightly; rises
|
b.
|
very; rises
|
c.
|
very; declines
|
d.
|
slightly; declines
|
38. The bonds that are most sensitive to interest rate movements have
a.
|
no coupon and a short-term maturity.
|
b.
|
high coupons and a short-term maturity.
|
c.
|
high coupons and a long-term maturity.
|
d.
|
no coupon and a long-term maturity.
|
39. When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security.
a.
|
high-risk; low-risk
|
b.
|
low-risk; high-risk
|
c.
|
high-risk; high-risk
|
d.
|
low-risk; low-risk
|
e.
|
none of the above
|
40. Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?
a.
|
$1,000.00
|
b.
|
$1,147.20
|
c.
|
$856.80
|
d.
|
none of the above
|
41. Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?
a.
|
10 percent
|
b.
|
8.82 percent
|
c.
|
4.32 percent
|
d.
|
13.86 percent
|
e.
|
none of the above
|
42. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
a.
|
$9.33 million
|
b.
|
$11.00 million
|
c.
|
$10.64 million
|
d.
|
$9.82 million
|
e.
|
none of the above
|
43. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is
a.
|
1.90 years.
|
b.
|
1.50 years.
|
c.
|
1.92 years.
|
d.
|
none of the above
|
44. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is
a.
|
1.73 years.
|
b.
|
1.71 years.
|
c.
|
1.90 years.
|
d.
|
none of the above
|
45. The relationship reflecting the actual response of a bond's price to a change in bond yields is
a.
|
concave.
|
b.
|
convex.
|
c.
|
linear.
|
d.
|
quadratic.
|
46. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
a.
|
increase; upward; downward
|
b.
|
decrease; upward; downward
|
c.
|
decrease; upward; upward
|
d.
|
increase; downward; upward
|
e.
|
increase; upward; upward
|
47. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.
a.
|
matching
|
b.
|
laddered
|
c.
|
barbell
|
d.
|
interest rate
|
e.
|
none of the above
|
48. With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.
a.
|
matching
|
b.
|
laddered
|
c.
|
barbell
|
d.
|
interest rate
|
e.
|
none of the above
|
49. Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?
a.
|
short-term, high-coupon
|
b.
|
short-term, low-coupon
|
c.
|
long-term, high-coupon
|
d.
|
long-term, zero-coupon
|
50. Which of the following is most likely to cause a decrease in bond prices?
a.
|
a decrease in money supply growth and an increase in the demand for loanable funds
|
b.
|
a forecast of decreasing oil prices
|
c.
|
a forecast of a stronger dollar
|
d.
|
an increase in money supply growth and no change in the demand for loanable funds
|
51. If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.
a.
|
downward pressure; downward pressure
|
b.
|
downward pressure; upward pressure
|
c.
|
upward pressure; upward pressure
|
d.
|
upward pressure; downward pressure
|
52. Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.
a.
|
increase; long-maturity bonds with zero-coupon rates
|
b.
|
decrease; short-maturity bonds with high-coupon rates
|
c.
|
increase; high-coupon bonds with long maturities
|
d.
|
decrease; long-maturity bonds with zero-coupon rates
|
53. The market price of a bond is partly determined by the timing of the payments made to bondholders.
a. True
b. False
54. The appropriate price of a bond is simply the sum of the cash flows to be received.
a. True
b. False
55. The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.
a. True
b. False
56. Bonds that sell below their par value are called premium bonds.
a. True
b. False
57. A zero-coupon bond makes no coupon payments.
a. True
b. False
58. If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.
a. True
b. False
59. An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.
a. True
b. False
60. The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.
a. True
b. False
61. If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.
a. True
b. False
62. Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.
a. True
b. False
63. Any announcement that signals stronger than expected economic growth tends to increase bond prices.
a. True
b. False
64. Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.
a. True
b. False
65. As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on long-term bonds.
a. True
b. False
66. Duration is a measure of bond price sensitivity.
a. True
b. False
67. A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.
a. True
b. False
68. International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.
a. True
b. False
69. In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.
a. True
b. False
70. Which of the following formulas best describes the value of a bond?
a.
| |
b.
| |
c.
| |
d.
| |
e.
|
none of the above
|
71. Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the bond?
a.
|
$1,000.00
|
b.
|
$1,147.20
|
c.
|
$856.80
|
d.
|
none of the above
|
72. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?
a.
|
$1,063.40
|
b.
|
$1,000
|
c.
|
$939.25
|
d.
|
none of the above
|
73. To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?
a.
|
The annualized coupon should be split in half.
|
b.
|
The annual discount rate should be divided by 2.
|
c.
|
The number of annual periods should be doubled.
|
d.
|
The par value should be split in half.
|
e.
|
All of the above adjustments have to be made.
|
74. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for
a.
|
$1,000.00.
|
b.
|
$1,081.11.
|
c.
|
$798.70.
|
d.
|
$880.22.
|
e.
|
none of the above.
|
75. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
a.
|
increase; upward; downward
|
b.
|
decrease; upward; downward
|
c.
|
decrease; upward; upward
|
d.
|
increase; upward; upward
|
e.
|
increase; downward; upward
|
76. An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.
a.
|
weak; decrease
|
b.
|
strong; increase
|
c.
|
weak; increase
|
d.
|
strong; decrease
|
e.
|
Answers C and D are correct.
|
77. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is
a.
|
0.77.
|
b.
|
-0.77.
|
c.
|
-0.90.
|
d.
|
-1.06.
|
e.
|
none of the above.
|
78. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is
a.
|
-0.36.
|
b.
|
-0.44.
|
c.
|
-0.55.
|
d.
|
-0.67.
|
e.
|
0.67.
|
79. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.
a.
|
1.92
|
b.
|
1.50
|
c.
|
1.90
|
d.
|
none of the above
|
80. A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.
a.
|
1.33
|
b.
|
1.27
|
c.
|
3.24
|
d.
|
1.31
|
e.
|
none of the above
|
81. If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.
a.
|
underestimate; underestimate
|
b.
|
overestimate; overestimate
|
c.
|
underestimate; overestimate
|
d.
|
overestimate; underestimate
|
82. In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity.
a.
|
matching
|
b.
|
laddered
|
c.
|
barbell
|
d.
|
interest rate
|
e.
|
none of the above
|
83. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.
a.
|
matching
|
b.
|
laddered
|
c.
|
barbell
|
d.
|
interest rate
|
e.
|
none of the above
|
84. Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor?
a.
|
foreign interest rate movements
|
b.
|
credit risk
|
c.
|
exchange rate fluctuations
|
d.
|
All of the above are factors affecting the market price of a foreign bond.
|
1. Mortgage-backed securities are commonly contained within collateralized debt obligations.
a. True
b. False
2. Federally insured mortgages guarantee
a.
|
loan repayment to the lending financial institution.
|
b.
|
that the interest rate will not increase during the life of the mortgage.
|
c.
|
the lending financial institution a selling price for the mortgage in the secondary market.
|
d.
|
all of the above
|
3. At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
a.
|
below
|
b.
|
above
|
c.
|
equal to
|
d.
|
all of the above are very common
|
4. An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
a.
|
stable; decreasing
|
b.
|
increasing; stable
|
c.
|
increasing; decreasing
|
d.
|
decreasing; increasing
|
5. Rates for adjustable-rate mortgages are commonly tied to the
a.
|
average prime rate over the previous year.
|
b.
|
Fed's discount rate over the previous year.
|
c.
|
average Treasury bill rate over the previous year.
|
d.
|
average Treasury bond rate over the previous year.
|
6. Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
a.
|
2 percent per year and 5 percent for the mortgage lifetime.
|
b.
|
5 percent per year and 15 percent for the mortgage lifetime.
|
c.
|
0 percent per year and 10 percent for the mortgage lifetime.
|
d.
|
3 percent per year and 8 percent for the mortgage lifetime.
|
7. From the perspective of the lending financial institution, interest rate risk is
a.
|
lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
|
b.
|
lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
|
c.
|
higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
|
d.
|
higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
|
8. Mortgage companies specialize in
a.
|
purchasing mortgages originated by other financial institutions.
|
b.
|
investing and maintaining mortgages that they create.
|
c.
|
originating mortgages and selling those mortgages.
|
d.
|
borrowing money through the creation of mortgages that is used to invest in real estate.
|
9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.
a.
|
greater; greater
|
b.
|
greater; lower
|
c.
|
lower; greater
|
d.
|
lower; lower
|
10. A financial institution has a higher degree of interest rate risk on a ____ than a ____.
a.
|
30-year fixed-rate mortgage; 15-year fixed-rate mortgage
|
b.
|
30-year variable-rate mortgage; 30-year fixed-rate mortgage
|
c.
|
15-year fixed-rate mortgage; 30-year fixed-rate mortgage
|
d.
|
15-year variable-rate mortgage; 15-year fixed-rate mortgage
|
11. A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.
a. True
b. False
12. Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
a.
|
1,014; 264
|
b.
|
1,241; 750
|
c.
|
1,014; 750
|
d.
|
none of the above
|
13. A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)
a.
|
chattel mortgage.
|
b.
|
balloon payment mortgage.
|
c.
|
variable-rate mortgage.
|
d.
|
open-ended mortgage bond.
|
14. In an amortization schedule of monthly mortgage payments
a.
|
the amount of interest in each payment is equal to the principal paid.
|
b.
|
interest payments exceed principal payments early on.
|
c.
|
principal payments exceed interest payments early on.
|
d.
|
B and C both occur with about equal frequency
|
15. A mortgage with low initial payments that increase over time without ever leveling off is a
a.
|
graduated payment mortgage.
|
b.
|
growing-equity mortgage.
|
c.
|
second mortgage.
|
d.
|
shared-appreciation mortgage.
|
16. The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
a.
|
higher than; behind
|
b.
|
equal to that; equal to
|
c.
|
lower than; ahead of
|
d.
|
higher than; ahead of
|
e.
|
lower than; behind
|
No comments:
Post a Comment