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37 terms
oliviacleve
The annual interest paid on a bond relative to its prevailing market price is called its
____.
A. Promised yield
B. Yield to maturity
C. Coupon rate
D. Effective yield
E. Current yield
E
If the holding period is equal to the term to maturity for a corporate bond the rate of
discount represents the
A. Coupon yield.
B. Effective yield.
C. Yield to call.
D. Yield to maturity.
E. Reinvestment rate.
D
The nominal yield of a bond is the
A. Annual coupon as a percent of the current price.
B. Annual rate earned including the capital gain or loss.
C. Rate earned giving consideration to coupon reinvestment.
D. Coupon rate.
E. Promised yield to maturity.
D
If the coupon payments are not reinvested during the life of the issue then the
A. Promised yield is greater than the realized yield.
B. Promised yield is less than the realized yield.
C. Nominal yield declines.
D. Nominal yield is greater than the promised yield.
E. Current yield equals the yield to maturity.
A
The importance of the reinvestment assumption increases with a ____ coupon and a
____ term to maturity.
A. Low, short
B. Low, long
C. High, short
D. High, long
E. Zero, very long
D
The best way for an investor to "lock in" to high interest rates would be to purchase a
bond that has a ____ coupon and a ____ term to maturity.
A. Low, short
B. Low, long
C. High, short
D. High, long
E. Zero, very long
E
The term structure of interest rates is a static function that relates the
A. Term to call and the yield to maturity.
B. Term to maturity and the yield to maturity.
C. Term to call and the yield to call.
D. Term to maturity and the coupon rate.
E. Term to maturity and the current yield.
B
The yield to call is a more conservative yield measure whenever the price of a callable
bond is quoted at a value
A. Equal to or greater than par plus one year's interest.
B. Equal to par.
C. Equal to par less one year's interest.
D. Less than par.
E. Five percent over par.
A
Which of the following is not a major risk premium component for bond investors?
A. Quality differentials.
B. Term to maturity.
C. Indenture provisions.
D. Yield to maturity.
E. Exchange rate risk differences.
D
There are four major factors accounting for the existence of yield differentials. Which of
the following is not a factor?
A. Segments
B. Sectors
C. Indentures
D. Coupons
E. Maturities
C
The convexity of a bond is affected as follows:
A. Positively with maturity.
B. Positively with yield.
C. Inversely with coupon.
D. Choices a and b
E. Choices a and c
E
Which of the following statements is true?
A. An inverse relationship exists between coupon and convexity.
B. A direct relationship exists between maturity and convexity.
C. An inverse relationship exists between yield and convexity.
D. Choices a and c only
E. All of the above statements are true
E
If you expected interest rates to fall, you would prefer to own bonds with
A. long durations and high convexity.
B. long durations and low convexity.
C. short durations and high convexity.
D. short durations and low convexity.
E. none of the above.
A
If you expected interest rates to fall, you would prefer to own bonds with
A. short maturities and low coupons.
B. long maturities and high coupons .
C. long maturities and low coupons.
D. short maturities and high coupons.
E. none of the above.
C
If you expected interest rates to rise, you would prefer to own bonds with
A. short maturities and low coupons.
B. long maturities and high coupons .
C. long maturities and low coupons.
D. short maturities and high coupons.
E. none of the above.
D
According to the liquidity preference hypothesis yield curves generally slope upward
because
A. investors prefer short maturity obligations to long maturity obligations.
B. investors prefer long maturity obligations to short maturity obligations.
C. investors prefer less volatile long maturity obligations.
D. investors prefer more volatile short maturity obligations.
E. none of the above.
A
According to the segmented-market hypothesis a downward sloping yield curve
indicates that
A. demand for long term bonds has fallen and demand for short term bonds has fallen.
B. demand for long term bonds has risen and demand for short term bonds has fallen.
C. demand for long term bonds has fallen and demand for short term bonds has risen.
D. demand for long term bonds has risen and demand for short term bonds has risen.
E. none of the above.
B
According to the segmented-market hypothesis a rising yield curve indicates that
A. demand for long term bonds has fallen and demand for short term bonds has fallen.
B. demand for long term bonds has risen and demand for short term bonds has fallen.
C. demand for long term bonds has fallen and demand for short term bonds has risen.
D. demand for long term bonds has risen and demand for short term bonds has risen.
E. none of the above.
C
According to the expectations hypothesis a rising yield curve indicates that investors
expect
A. future short term rates to fall
B. future short term rates to rise
C. future long term rates to rise
D. future long term rates to fall
E. none of the above
B
The price-yield relationship for a bond will become more convex
A. For a low coupon bond.
B. For a high coupon bond.
C. For a long maturity bond.
D. b and c.
E. a and c.
E
Convexity is a desirable feature of bonds because.
A. As interest rates decline, the price of a low convexity bond decreases at a decreasing
rate.
B. As interest rates decline, the price of a high convexity bond decreases at an
increasing rate.
C. As interest rates decline, the price of a low convexity bond increases at a decreasing
rate.
D. As interest rates decline, the price of a high convexity bond increases at an
increasing rate.
E. As interest rates decline, the price of a high convexity bond decreases at a
decreasing rate.
D
The position of a bondholder that is long a callable bond is equal to being
A. Long a noncallable bond + long a call option on the bond.
B. Long a noncallable bond + short a call option on the bond.
C. Short a noncallable bond + long a call option on the bond.
D. Short a noncallable bond + short a call option on the bond.
E. None of the above.
B
Option adjusted duration can be calculated as
A. Duration of noncallable bond - duration of call option on the bond.
B. Duration of noncallable bond + duration of call option on the bond.
C. Duration of callable bond - duration of call option on the bond.
D. Duration of callable bond + duration of call option on the bond.
E. None of the above.
A
The option adjusted duration will approach the duration to maturity, when
A. Interest rates are significantly above the coupon rate because the option has very
little chance of being called, and the call option will have very little value.
B. Interest rates are significantly below the coupon rate because the option has very
little chance of being called, and the call option will have very little value.
C. Interest rates are significantly above the coupon rate because the option has a high
chance of being called, and the call option will have significant value.
D. Interest rates are significantly below the coupon rate because the option has a high
chance of being called, and the call option will have significant value.
E. None of the above.
A
The promised yield to maturity calculation assumes that
A. All coupon interest payments are reinvested at the current market interest rate for the
bond.
B. All coupon interest payments are reinvested at the coupon interest rate for the bond.
C. All coupon interest payments are reinvested at short term money market interest
rates.
D. All coupon interest payments are not reinvested.
E. None of the above
A
If the coupon payments are not reinvested during the life of the issue then the
A. Promised yield is greater than realized yield.
B. Promised yield is less than realized yield.
C. Nominal yield declines.
D. Nominal yield is greater than promised yield.
E. Current yield equals the yield to maturity.
A
Consider a bond portfolio manager who expects interest rates to decline and has to
choose between the following two bonds.
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28 terms
oliviacleve
Features
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43 terms
oliviacleve
The bond market segments that tend to be highly correlated and move together include
A. Short and long term bonds.
B. Short and intermediate term bonds.
C. Intermediate and long term bonds.
D. Short, intermediate and long term bonds.
E. None of the above.
D
Of the following provisions that might be found in a bond indenture, which would tend to
reduce the coupon interest rate?
A. A call provision
B. No restrictive covenants
C. A sinking fund provision
D. Change in bond rating from Aaa to Aa
E. None of the above (that is, all will increase the coupon rate)
C
The refunding provision of an indenture allows bonds to be retired unless
A. They are replaced with a lower coupon bond issue.
B. The remaining time to maturity is less than five years.
C. The remaining time to maturity is greater than five years.
D. The stated time period in the indenture has not passed.
E. The stated time period in the indenture has passed.
A
Serial bonds
A. Can be callable.
B. Can have sinking funds.
C. Have different maturity dates.
D. All of the above.
E. None of the above.
B
Which of the following statements is not true regarding bond ratings?
A. The ratings assigned are meant to indicate the probability of default for the bond
issuer.
B. The bonds assigned one of the top four rating classes are considered investment
grade bonds.
C. Once a rating is assigned to an issue it cannot be changed for the first two years
after which it is reviewed on a regular basis.
D. Bonds rated BB and below are referred to as high yield or "junk" bonds.
E. The rating agencies modify the ratings with + and - signs or numbers after the letters.
C
When a fixed income security is being traded but the issuer is not meeting interest
payments it is trading
A. Stamped.
B. Registered.
C. Flat.
D. Round.
E. No accrual.
C
Which type of bond is backed by the full faith and credit of the issuer and its entire
taxing power?
A. Fannie Mae
B. Freddie Mac
C. GSEs
D. General obligation
E. Revenue
D
The bonds issued by the Bank of England are known as
A. Gilts.
B. Bunds.
C. Limies.
D. Treasuries.
E. Benchmarks.
A
When a bond issue is secured by a legal claim on equipment it is known as a(n)
A. Junior bond.
B. Income bond.
C. Bearer bond.
D. Trust certificate.
E. Perpetuity.
D
Which set of conditions will result in a bond with the greatest volatility?
A. A high coupon and a short maturity
B. A high coupon and a long maturity
C. A low coupon and a short maturity
D. A low coupon and a long maturity
E. A deferred call feature and a sinking fund.
D
The annual interest paid on a bond relative to its prevailing market price is called its
A. Promised yield.
B. Yield to maturity.
C. Coupon rate.
D. Effective yield.
E. Current yield.
E
The institutions which invest most heavily in corporate bond issues are
A. Life insurance companies and commercial banks.
B. Life insurance companies and property and liability insurance companies.
C. Life insurance companies and pension funds.
D. Commercial banks and property and liability insurance companies.
E. Commercial banks and pension funds.
C
Which of the following is not a major rating agency for bonds?
A. Moody's
B. Standard & Poor's
C. Fitch Investor Services
D. Value Line
E. Duff and Phelps
D
Treasury bonds which can be purchased at a discount to be used at par to pay estate
taxes are called
A. Estate bonds.
B. Flower bonds.
C. Municipal bonds.
D. Probate bonds.
E. Survivor bonds.
B
The major owners of high-yield bonds have been
A. Commercial banks.
B. Savings and loans.
C. Mutual funds.
D. California Credit Unions (CCU's).
E. European banks.
C
When a fixed income security is being traded at the price above its face value it is
trading
A. At a discount.
B. At par.
C. At a premium.
D. Flat.
E. No accrual.
C
A security that has a coupon that is periodically adjusted is a(n)
A. Variable note.
B. Variation note.
C. Adjustable coupon note.
D. Money market certificate.
E. Deep discount bond.
A
The following are participating issuers in bond markets:
A. Governments.
B. School districts.
C. Corporations
D. a and c.
E. a, b and c.
E
The following are participating investors in bond markets:
A. U.S. Treasury.
B. Life insurance companies.
C. Commercial banks.
D. a and b.
E. b and c.
E
Institutional investors typically account for about
A. 90 to 95 percent of bond market trading.
B. 40 to 50 percent of bond market trading.
C. 10 to 15 percent of bond market trading.
D. Less than 5% of bond market trading.
E. None of the above.
A
Alternative institutions favor different sectors of the bond market based on
A. The level of interest rates.
B. The tax code applicable to the institution.
C. The nature of the institution's asset structure
D. a and b.
E. b and c.
B
Bond ratings are positively related to
A. Leverage.
B. Size.
C. Type of business.
D. All of the above.
E. None of the above.
B
Bond ratings are negatively related to
A. Profitability.
B. Cash flow coverage.
C. Earnings instability.
D. All of the above.
E. None of the above.
C
TIPS are U.S Treasury securities where the coupon rate is
A. Zero
B. Indexed to the rate of inflation.
C. Indexed to the discount rate.
D. Indexed to the prime rate.
E. None of the above.
B
If the yield to maturity for a par value TIPS bond with 8 years to maturity is 3%, and the
yield to maturity of a U.S Treasury note with 8 years is 4.25%, this implies that
A. The expected annual rate of inflation over the next 8 years is -1.25%.
B. The expected annual rate of inflation over the next 8 years is 1.25%.
C. The expected annual rate of inflation over the next 8 years is -2.25%
D. The expected annual rate of inflation over the next 8 years is 2.25%
E. None of the above.
B
The face value of a U.S. government agency security
A. Is always $1000.
B. Ranges from $1000 to $5000.
C. Ranges from $1000 to $100,000.
D. Ranges from $1000 to $50,000.
E. Is always $10,000.
C
A major source of risk faced by GNMA issues is
A. Default risk.
B. Prepayment risk.
C. Counterparty risk.
D. a and b.
E. a, b and c.
B
When homeowners pay off mortgages when they sell their homes, or when
homeowners refinance home mortgages, they effectively
A. Make the maturities of GNMA securities longer.
B. Make the maturities of GNMA securities shorter.
C. Make the maturities of U.S. Treasury securities longer.
D. Make the maturities of U.S. Treasury securities shorter.
E. None of the above.
B
General obligation bonds are
A. U.S. Treasury bonds backed by the full faith and credit of the issuer.
B. U.S. Treasury bonds backed by income generated form specific projects.
C. Municipal bonds backed by the full faith and credit of the issuer.
D. Municipal bonds backed by income generated from specific projects.
E. A type of U.S. agency security.
C
Revenue bonds are
A. U.S. Treasury bonds backed by the full faith and credit of the issuer.
B. U.S. Treasury bonds backed by income generated form specific projects.
C. Municipal bonds backed by the full faith and credit of the issuer.
D. Municipal bonds backed by income generated from specific projects.
E. A type of U.S. agency security.
D
Collateralized Mortgage obligations are
A. Mortgage pass-through securities.
B. Mortgage pass-through securities with varying maturities.
C. Mortgage pass-through securities with no default risk.
D. Mortgage pass-through securities with variable coupon rates.
E. None of the above.
B
A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a
A. Samurai bond.
B. Eurobond.
C. Yankee bond.
D. Euroyen bond
E. Foreign bond.
B
The legal document setting forth the obligations of a bond's issuer is called
A. A debenture.
B. A warrant.
C. An indenture.
D. A rights certificate.
E. A trustee deed.
C
Collateralized mortgage obligations (CMOs) offset some of the problems associated
with traditional mortgage pass-throughs because
A. They are overcollateralized.
B. They have variable rates.
C. Collateralized by auto-loans.
D. They are deep discount instruments.
E. Collateralized by credit card debt.
A
A bond that only pays a principal payment at maturity date is known as a(n):
A. Blank bond.
B. Maturity bond.
C. Interest free bond.
D. Mini-coupon bond.
E. Zero coupon bond.
E
What was developed in the early 1980s to offset some of the problems with traditional
mortgage pass-throughs?
A. Variable rate mortgages.
B. Collateralized mortgage obligations (CMOs)
C. Leveraged buyouts (LBOs)
D. Deep discount bonds (DDBs)
E. High yield bonds.
B
Which of the following statements regarding Collateralized Debt Obligations (CDOs) is
false?
A. CDOs experienced rapid growth since the year 2000.
B. The assets used to back the CDOs are substantially diverse.
C. The credit quality within a CDO at the time of issue is diverse.
D. CDOs have generated significant credit and liquidity problems.
E. All of the above statements are true.
E
A U.S. dollar-denominated bond sold in the United States by a Japanese-firm is called
a(n):
A. Yankee bond.
B. Homeland bond.
C. International bond.
D. U.S. Domestic bond.
E. Japanese U.S. Regional bond.
A
Which of the following entities acquire mortgages and create mortgage backed
securities?
A. Federal National Mortgage Association (Fannie Mae)
B. Government National Mortgage Association (Ginnie Mae)
C. Federal Home Loan Mortgage Corporation (Freddie Mac)
D. All of the above.
E. None of the above.
D
When a borrower pledges financial assets as collateral for a bond it is called a(n)
A. Mortgage bond.
B. Equipment trust certificate.
C. Mortgage pass-through security.
D. Collateral trust bond.
E. Collateralized mortgage obligation (CMO).
D
Issues that provide funds to retire another issue early are known as
A. Bearer bonds
B. Secured debentures
C. Unsecured debentures
D. Revenue bonds
E. Refunding bonds
E
Which bond provision would be considered the most risky for an investor who is
concerned that market interest rates will drop dramatically over the life of the bond?
A. Sinking fund
B. Deferred call
C. Freely callable
D. Non-callable
E. None of the above
C
Which type of bond market is the largest sector in both Japan and the United States?
A. Corporate
B. High Yield/Emerging Market
C. Securitized/Collaterallized
D. Sovereign
E. Quasi & Foreign Governments
D
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