FIN/350 Week 5 Quiz - Strayer

FIN 350 Week 5 Quiz – Strayer

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Week 5 Quiz 4 Chapter 7 and 8

Chapter 7—Bond Markets

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. Trueb. 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

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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. Trueb. 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. Trueb. 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


18. A private bond placement has to be registered with the SEC.a. Trueb. 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.


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. Trueb. 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. Trueb. 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


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


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. Trueb. False

44. Corporate bonds can be placed with investors through a public offering or a private placement.a. Trueb. 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. Trueb. 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. Trueb. False

47. Rule 144A creates liquidity for securities that are privately placed.

a. Trueb. False

48. Corporate bonds are more standardized than stocks.a. Trueb. 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. Trueb. False

50. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.a. Trueb. False

51. The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.a. Trueb. False

52. Bond dealers do not have an inventory of bonds.a. Trueb. False

53. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.a. Trueb. False

54. Many bonds are listed on the New York Stock Exchange (NYSE).a. Trueb. False

55. The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies.a. Trueb. 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. Trueb. False

57. Treasury bonds are issued by state and local governments.a. Trueb. 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. Trueb. 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. Trueb. False

60. Savings bonds are bonds issued by the Federal Reserve.a. Trueb. False

61. Corporate bonds usually pay interest on an annual basis.a. Trueb. False

62. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.a. Trueb. False

63. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.a. Trueb. 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. Trueb. False

65. High-risk bonds are called trash bonds.a. Trueb. False

66. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.a. Trueb. False

67. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.a. Trueb. 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


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


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


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


78. The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk.

a. Trueb. False

79. The issuance of municipal securities is regulated by:

a. the Securities and Exchange Commission.

b. the Consumer Financial Protection Bureau.

c. their respective state governments.

d. the Federal Reserve.

80. For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.

a. specific value

b. fixed proceeds

c. best efforts

d. firm commitment

81. For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer.

a. floating value

b. variable proceeds

c. best efforts

d. firm commitment

82. Which of the following eurozone countries has not recently experienced debt repayment problems?

a. Finland

b. Greece

c. Portugal

d. Spain

83. The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.

a. Federal Ratings Bureau

b. Office of Credit Ratings

c. Office of Agency Supervision

d. Ratings Oversight Commission

84. A credit rating agency is paid by:

a. the purchasers of the bonds that the agency rates.

b. the issuers of the bonds that the agency rates.

c. the taxpayers, because the rating agencies are government agencies.

d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.

85. All of the bonds issued by a particular company will have the same maturity, price, and credit rating.

a. Trueb. False

86. When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.

a. limit order

b. market order

c. stop order

d. price order

87. Online bond brokerage services offer several advantages including:

a. pricing is more transparent because investors can easily compare bid and ask spreads.

b. some services charge commissions, which may be more easily understood than bid and ask spreads.

c. some brokers have narrowed their spreads so that they do not lose business to

competitors.

d. all of the above

Chapter 8—Bond Valuation and Risk

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


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


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


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


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


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


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


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


17. Other things held constant, bond prices should increase when inflationary expectations rise.a. Trueb. False

18. An expected ____ in economic growth places ____ pressure on bond prices.

a. increase; downward

b. increase; upward

c. decrease; downward


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


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 ____.





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.





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.





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


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


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


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


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.


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.


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


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


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. Trueb. False

54. The appropriate price of a bond is simply the sum of the cash flows to be received.a. Trueb. False

55. The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.a. Trueb. False

56. Bonds that sell below their par value are called premium bonds.a. Trueb. False

57. A zero-coupon bond makes no coupon payments.a. Trueb. 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. Trueb. 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. Trueb. False

60. The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.a. Trueb. 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. Trueb. 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. Trueb. False

63. Any announcement that signals stronger than expected economic growth tends to increase bond prices.a. Trueb. False

64. Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.a. Trueb. False

65. As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on long-term bonds.a. Trueb. False

66. Duration is a measure of bond price sensitivity.a. Trueb. 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. Trueb. 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. Trueb. False

70. Which of the following formulas best describes the value of a bond?

a.

b.

c.

d.


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


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


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


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


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


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


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.

85. When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.

a. higher; lower

b. higher; higher

c. lower; higher

d. lower; lower

86. Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates.

a. higher; lower

b. higher; higher

c. lower; higher

d. lower; lower

87. The credit risk premium tends to be larger for bonds that have longer terms to maturity.

a. Trueb. False

88. The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.

a. Financial Risk Assessment Commission

b. Financial Markets Protection Agency

c. Financial Stability Oversight Council

d. Federal Bureau of Financial Markets

89. When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly:

a. allows the country’s government to conduct its own monetary policy.

b. recommends that the country withdraw from the eurozone.

c. urges the country’s government to increase spending and lower taxes to stimulate the economy.

d. imposes austerity conditions to enable the government to reduce its budget deficit.

90. Although the European debt crisis has had substantial effects on European financial markets, the crisis has been contained and has not affected markets and financial institutions outside Europe.

a. Trueb. False

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FIN/350 Week 5 Quiz - Strayer