FINA 3000 Book Questions

Which of the following statements about bonds is true?

Treasury bonds are often referred to as government bonds.

What is one major advantage that municipal bonds have over other types of bonds?

The interest earned from municipal bonds is exempt from federal taxes and potentially state taxes.

In bond valuation, the term

represents

the market rate of interest on a bond

In order for a bond's yield to be most useful, it should provide

the investor an estimate on the rate of return if the bond was purchased today and held until maturity.

If you have an outstanding bond with 10 years to maturity, and the annual coupon payment varies each year, you probably have a

floating-rate bond

The capital gain yield in any given year is calculated as

a bond's annual change in price divided by its beginning of the year price.

Which of the following is true about price risk of a bond?

higher-coupon bonds have a relatively low level of price risk

When considering the riskiness of a bond, a positive maturity risk premium implies that generally

investors disregard the investment horizon when choosing between long- and short-term bonds.

Which of the following statements regarding default risk is CORRECT?

All mortgage bonds are subject to an indenture agreement

Which of the following statements regarding bankruptcy is TRUE?

Chapter 7 bankruptcy requires the company to liquidate assets.

Corporate bonds are traded primarily in over the counter (OTC) markets and are most commonly owned and traded

by large financial institutions such as life insurance companies.

Which of the following statements is CORRECT regarding the determination of bond ratings?

Exposure to subprime loans is the most important qualitative factor in determinants of bonds ratings.

Which of the following statements regarding bond sinking funds is CORRECT?

Bonds with sinking funds are considered safer, so they have lower coupon rates than bonds without sinking funds.