5: BOND MARKETS

Indenture

A(n)________ is used to outline the issuing company's contractual obligations to bondholders.

a. mortgage

b. debenture

c. bond rating

d. indenture

Is the required return on the bond.

The yield to maturity on a bond:

a. is fixed in the indenture.

b. is lower for higher-risk bonds.

c. is the required return on the bond.

d. is generally equal to the coupon interest rate.

Market interest rates decline sharply.

Which of the following events would make it more likely that a company would call its outstanding callable bonds

a. The company’s bonds are downgraded.

b. Market interest rates rise sharply.

c. Market interest rates decline sharply.

d. The company's financial situation deteriorates significantly.

The bond’s expected capital gains yield is zero.

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par (P1,000). Which of the following statements is CORRECT?

a. The bond’s expected capital gains yield is zero.

b. The bond’s yield to maturity is above 9%.

c. The bond’s current yield is above 9%.

d. If the bond’s yield to maturity declines, the bond will sell at a discount.

All else equal, if a bond’s yield to maturity increases, its price will fall.

Which of the following statements is CORRECT?

a. A zero-coupon bond's current yield is equal to its yield to maturity.

b. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.

c. All else equal, if a bond’s yield to maturity increases, its price will fall.

d. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

The bond’s yield to maturity is greater than its coupon rate.

A 15-year bond with a face value of P1,000 currently sells for P850. Which of the following statements is CORRECT

a. The bond’s coupon rate exceeds its current yield.

b. The bond’s current yield exceeds its yield to maturity.

c. The bond’s yield to maturity is greater than its coupon rate.

d. The bond’s current yield is equal to its coupon rate.

All else equal, long-term bonds have less reinvestment rate risk than short-term bonds

Which of the following statements is CORRECT?

a. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

b. All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

c. All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

d. All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

The market rate of interest.

Which of the following is used as a discount rate used to value a bond?

a. the market rate of interest.

b. the coupon interest rate.

c. determined by the issuing company.

d. fixed for the life of the bond.

No coupon and a long-term maturity.

Which of the following bonds are most sensitive to interest rate movements?

a. no coupon and short-term maturity.

b. high coupons and short-term maturity.

c. high coupons and a long-term maturity.

d. no coupon and a long-term maturity.

I only

Which of the following statements about convertible bonds is/are true?

I. bonds that may be converted to a certain number of shares of stock are determined by the conversion ratio.

II. options attached to bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond.

III. bonds collateralized with certain types of automobiles.

a. I only

b. II only

c. III only

d. All are true

AA-rated callable corporate bond without a sinking fund

Which one of the following bonds is the riskiest investment?

a. AAA-rated non-callable corporate bond with a sinking fund

b. An AA-rated callable corporate bond with a sinking fund

c. AA-rated callable corporate bond without a sinking fund

d. An AAA-rated callable corporate bond with a sinking fund

II and III only

Which of the following statements is/are true about callable bonds?

I. Must always be called at par

II. Will normally be called after interest rates drop

III. Have higher required returns than non-callable bonds

a. I and II only

b. I and III only

c. II and III only

d. All of them are correct

I and III only

Which of the following statements about Eurobonds is/are true?

I. The issuer chooses the currency of denomination.

II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds.

III. Eurobonds are bearer bonds.

a. I and II only

b. I and III only

c. II and III

d. All are true

II only

Which of the following statements about bearer bonds is/are true?

1. The registered owner automatically receives bond payments when scheduled

2. Coupons attached that are redeemable by whoever has the bond.

3. It matures on a series of dates.

a. I only

b. II only

c. III only

d. All are true

STRIP.

It is a Treasury security in which periodic coupon interest payments can be separated from each other and the principal payment.

a. T-bill.

b. T-bond.

c. STRIP.

d. Corporate bond.

Equal to its par value.

Which of the following is correct regarding the price of the bond if the coupon rate equals the required rate of return?

a. Equal to its par value.

b. Above its par value.

c. Below its par value.

d. Cannot be determined

Greater is the discount on the price.

The higher the investor's required rate of return about the coupon rate, the

a. smaller is the premium on the price.

b. smaller is the discount on the price.

c. greater is the premium on the price.

d. greater is the discount on the price.

Zero-coupon payments

About the prices of bonds, which among the following are most sensitive to interest rate movements?

a. small coupon payments

b. high coupon payments

c. zero-coupon payments

d. answer not given

Less volatile than

Which of the following is correct with regards to the prices of short-term bonds as compared to long-term bonds?

a. equally volatile as

b. less volatile than

c. more volatile than

d. depends on the duration

Price

As interest rates, and consequently investors' required rates of return, change over time, the ________ of outstanding bonds will also change.

a. maturity date

b. coupon interest payment

c. par value

d. price

A 10-year zero-coupon bond.

Assume that all interest rates in the economy declined from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

a. An 8-year bond with a 9% coupon.

b. A 1-year bond with a 15% coupon.

c. A 3-year bond with a 10% coupon.

d. A 10-year zero-coupon bond.