Q&A Hero

Q: Assuming interest rates are expected to fall, which of the following will most likely maximize price increase? A.Commercial paper B.U.S. Treasury bills C.30-year corporate bonds D.There is not enough information to tell

Q: The conversion feature always causes the bond's price to vary with the stock price.

Q: What effect, if any, will a decrease in interest rates have on bond values? A.Bond values will increase B.Bond values will decrease C.Bond values may increase or decrease, depending on the maturity, quality, and coupon rate D.None of the above

Q: The Oxford Fixed Income Fund invests heavily in bonds. If the fund manager thinks that interest rates are going to fall, what changes should she make in her investment portfolio? A.Increase investment in long-term bonds B.Increase investment in short-term debt instruments C.Increase investment in equity securities D.Buy callable bonds E.Buy real assets

Q: With convertible bonds, the bond market price minus the conversion value is the conversion premium.

Q: Which of the following bond pricing rules is incorrect? A.Bond prices and interest rates are inversely related B.Prices of long-term bonds are less sensitive to changes in interest rates than short-term bonds C.Bond price sensitivity increases at a decreasing rate as maturity increases D.Bond prices are more sensitive to a decline in market yield to maturity

Q: Pure bond value is the conversion price, multiplied by the market price.

Q: The term structure of interest rates refers to: A.the relationships between interest rates and term to maturity. B.the idea that any long-term rate is the average of expected future short-term rates. C.a general expectation of higher future interest rates. D.the idea that the terms of the bond may change as time to maturity changes. E.More than one of the above are true

Q: Conversion value represents the total value of the underlying shares of common stock into which the security may be converted.

Q: Which is not a theory related to the term structure of interest ratio? A.Expectations hypothesis B.Liquidity preference theory C.Efficient market hypothesis D.Market segmentation theory

Q: Conversion value is the conversion price multiplied by the conversion ratio.

Q: What will happen to the market value of a bond if interest rates increase? A.The market value will decrease B.The market value will increase C.The market value will increase or decrease, depending on the general economic climate D.The market value should remain level

Q: Conversion ratio is the face value divided by the conversion price.

Q: When should an investor calculate both yield to maturity and yield to call? A.Whenever there is a call provision B.When the sum of the present values of the interest payments exceeds the call price C.When the market price is greater than or equal to the call price D.Whenever the funds can be reinvested E.When interest rates increase above the coupon rate

Q: Conversion price is the face value divided by the conversion ratio.

Q: What formula measure would an investor use to calculate the yield on a 20-year bond with 10 years to maturity, if he or she only intends to hold the bond for 5 years? A.Anticipated realized yield B.Yield to call C.Current yield D.Yield to maturity E.Any one of the above will measure the yield

Q: The total return an investor would receive from income plus capital appreciation, assuming a bond is held to maturity, is called the: A.call premium. B.current yield. C.yield to maturity. D.capital gains yield. E.More than one of the above

Q: The upward slope of the yield curve is caused by investors' recognition of the relative difficulty of converting long-term securities to cash. This is the: A.expectations hypothesis. B.liquidity preference theory. C.market segmentation theory. D.More than one of the above

Q: The value of a bond at any given time is the sum of: A.the future interest payments and the par value. B.the present value of future interest payments and the present value of the par value. C.the future value of the interest payments and the future value of the par value. D.the present value of future interest payments and the market value. E.the present value of future interest payments and the future value of the par value.

Q: A descending term structure reflects the view that rates will increase in the future.

Q: If an investor needs to increase the quality of his portfolio during the low-confidence periods of a recession, he can enjoy usually high returns on lower-grade instruments relative to higher grades.

Q: An ascending term structure reflects the view that rates will increase in the future.

Q: The expectations hypothesis is that any long-term rate is an average of the expectations of future short-term rate over the applicable time horizon.

Q: The term structure of interest rates depicts the relationship between maturity and interest rates.

Q: The anticipated realized yield represents the return over the holding period.

Q: Inflationary expectations have the greatest impact on short-term rates.

Q: Lower-quality bonds tend to be in high demand during a recession.

Q: Inflationary expectations have no effect on bond prices.

Q: Deep discount bonds are not prone to calls because they sell at low prices.

Q: Historically, interest rates have been coincident indicators in the economy.

Q: Deep discount bonds reflect questionable quality.

Q: The reinvestment assumption would have no effect on yield if the bond is held to maturity.

Q: Interest rate changes affect low-quality issues to a greater degree than high-quality issues.

Q: If the market price of a bond is less than the call price, yield to call is a reasonable calculation for yield.

Q: The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.

Q: Current yield is always the best measure of a bond's yield.

Q: A drop in interest rates causes proportionally greater gains than increases in rates will cause losses.

Q: Yield to maturity is equivalent to market rate of interest.

Q: Short-term rates are more volatile than long-term rates.

Q: The approximate yield to maturity method tends to understate the true yield for bonds trading at a discount.

Q: A basis point is one-tenth of l%.

Q: A 15-year, 7% coupon rate bond is selling for $771.82. What is the current yield of the bond?A.22.8%B.7.0%C.9.1%D.10.0%E.30.7%

Q: Yield to maturity can be thought of as the internal rate of return of the bond.

Q: Short-term interest rates have _________ volatility in comparison to long-term interest rates. A.Much less B.More C.Equal D.Slightly less

Q: Yield to maturity considers annual interest, difference between current price and maturity value, and years to maturity.

Q: The most widely used theory to explain the term structure of interest rates is the: A.liquidity preference theory. B.market segmentation theory. C.expectations hypothesis. D.interest allocation theory.

Q: Current yield does not take the maturity date into consideration.

Q: When the bond investor believes interest rates are going to fall, the best strategy would be to: A.take a bearish position in the market by selling long-term bonds. B.take a bullish position in the market by buying long-term bonds. C.move out of bonds completely. D.keep his portfolio unchanged.

Q: Current yield is the annual interest divided by the current price of the bond.

Q: Yield to maturity takes into account everything except: A.annual interest received. B.the difference between the current bond price and its maturity value. C.the number of years to maturity. D.the number of years since the bond's purchase.

Q: The price of a bond represents simply the future value of interest payments.

Q: As the economy recovers from a recession, what changes can be expected in the yield spread of corporate Baa bonds and U.S. government bonds? A.The yield on Baa bonds will approach that of government securities B.The yield spread between U.S. government bonds and BBB corporate bonds will stay the same C.The yield spread will increase D.Either A or B will occur

Q: a) What is the approximate yield to maturity of a 10% coupon rate, $1,000 par value bond which is currently priced at $1,200 with 11 years to maturity? b) What would be the yield to call if the call can be made in 7 years at a price of $1,025?

Q: The investor in deep-discount bonds generally accepts a lower yield because of: A.the unique conversion feature associated with deep discount bonds. B.the extremely low risk of a call. C.the fact that the return represents pure interest income. D.More than one of the above

Q: The impact of interest rate changes on bond prices can be magnified by: A.investing in speculative high-risk high-yield bonds. B.investing in higher-quality corporate bonds. C.investing in short-term bonds. D.More than one of the above

Q: What is the approximate yield to maturity of an 8% coupon bond, with a par value of $1,000?

Q: A down-sloping yield curve indicates: A.investors' anticipation of lower interest rates. B.investors' anticipation of lower inflation. C.that institutional investors are selling long-term bonds. D.More than one of the above

Q: What would be the current yield of a 6% coupon bond priced at $950?

Q: The market segmentation theory focuses on: A.the impact of institutional investors on the yield curve. B.the maturity preferences of banks and those of life insurance companies. C.phases of the business cycle. D.All of the above

Q: ABC Corp. issued a 12%, 20-year coupon rate bond 5 years ago. Interest rates are now 8%. Based on semi-annual analysis and using the table below, what is the current price of the bond?

Q: What is the dollar value of a U.S. government bond quoted at 98 8/32?

Q: Assume a $1,000 Treasury bill is quoted to pay 10% and matures in 3 months.a) How much interest would an investor receive?b) What will be the price of the Treasury bill?c) What will be the true rate of return?

Q: If inflation is higher than that expected at time of issue, inflation-indexed Treasury securities:A.provide a lower return than fixed-income securities.B.provide a higher return than fixed-income securities.C.do not adequately compensate the investor for loss of purchasing power.D.may be called in by the government.

Q: Assume a $1,000 Treasury bill is quoted to pay 9.5% interest over a six-month period.a) How much interest would an investor receive?b) What will be the price of the Treasury bill?c) What will be the true rate of return?

Q: Inflation-indexed Treasury securities provide returns through:A.interest payments, plus a conversion privilege.B.interest payments, plus an increase in value due to inflation.C.tax-exempt interest payments.D.cumulative interest payments.

Q: 19% Feedback: Refer to Equation 11-1. Y = i/(l-t) = 11.19% required before-tax yield on corporate bond.

Q: The junk bond market includes all of the following except:A.fallen angels.B.profitable companies undergoing expansion.C.growth companies (small firms not that well established, making them unable to receive an investment quality rating).D.companies undergoing restructuring because of a leveraged buyout (LBO) or unfriendly takeover.

Q: If an investor is in the 33% marginal tax bracket and can purchase a municipal bond paying 7.5%, what would the equivalent before-tax return from a corporate bond have to be to equate the two returns on a before-tax basis?

Q: The difference between a general obligation and a revenue bond is:A.the general obligation bond is backed by the full faith, credit, and "taxing power" of the governmental unit.B.that for a revenue bond, the repayment of the issue is fully dependent on the revenue-generating capability of a specific project or venture.C.that general obligation bonds are usually of high quality because of the taxing power behind most of them.D.All of the above

Q: An example of secured debt would be a:A.contract where two signatures specified how the contract would be paid.B.contract in which a court kept the contract in its possession to see that nothing would happen to it.C.contract in which real assets are pledged as security for a loan.D.debenture.

Q: A provision in which semiannual or annual contributions are made by a corporation into a fund administered by a trustee for purposes of debt retirement is referred to as a:A.call provision.B.put provision.C.sinking-fund provision.D.serial payment.

Q: A call feature may be valuable to:A.investors.B.the issuing company.C.corporate employers.D.the IRS.

Q: A corporate bond quoted at 108.25 is selling for:A.$108.25.B.$1,082.50.C.$10,825.D.None of the above

Q: A strong incentive to a corporation to meet preferred stock dividend payments is provided by the ___________ feature of some preferred stocks.A.CumulativeB.ConvertibleC.CallableD.All of the above

Q: Corporate bonds generally trade in units of:A.$100.B.$1,000.C.$5,000.D.$10,000.

Q: Which of the following is NOT a characteristic of preferred stock as an investment?A.Preferred stockholders are entitled to receive their dividend prior to payment of dividends to common stockholdersB.Preferred stock dividends are taxed at the capital gains rate for individual investorsC.Preferred stock dividends may be omitted by the corporation under certain circumstancesD.It is a hybrid security of common stock and debt

Q: All of the following are available to individual investors except:A.commercial paper.B.bankers' acceptances.C.money market funds.D.All of the above are available to individual investors

Q: Major investors in municipal bonds include:A.banks.B.pension funds.C.wealthy individuals.D.A and C

Q: The primary difference between large (jumbo) and small Certificates of Deposit, besides dollar amount, is:A.that jumbo certificates have a variable interest rate.B.that small certificates are considered to be risk-free.C.that there is no secondary market for small certificates of deposit.D.None of the above

Q: There is customarily a small spread between bid and asked prices of Treasury notes and bonds, because:A.they are traded at a discount from par.B.there is competition from other markets.C.the market for Treasury issues is liquid.D.there are not many government securities dealers.