Chapter 7 Bond Markets 315 Chapter 7 Bond Markets 1 bonds 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 ANSWER A 2 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 ANSWER A 3 Investors in Treasury notes and bonds receive interest payments from the Treasury A annual B semiannual C quarterly D monthly ANSWER B 4 Since 2001 the Treasury has relied on year bonds to finance the U S budget deficit A 30 B 20 C 10 D 5 ANSWER C 5 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 ANSWER C 316 Chapter 7 Bond Markets 6 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 ANSWER A 7 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 ANSWER C 8 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 ANSWER B 9 Bonds issued by the are backed by the federal government A Government National Mortgage Association Ginnie Mae B Federal Home Loan Mortgage Association Freddie Mac C Federal National Mortgage Association Fannie Mae D All of these are insured by the federal government ANSWER A 10 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 ANSWER B Chapter 7 Bond Markets 317 11 In general variable rate municipal bonds are desirable to investors who expect that interest rates will A remain unchanged B fall C rise D do none of these ANSWER C 12 The municipal yield curve is typically than the Treasury yield curve and the shape of the municipal yield curve is the shape of the Treasury yield curve A lower similar to B higher very different than C lower very different than D higher similar to ANSWER D 13 Corporate bonds that receive a rating from credit rating agencies are normally placed at yields A higher lower B lower lower C higher higher D none of these ANSWER A 14 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 and loan association ANSWER C 15 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 D do none of these ANSWER C 16 A call provision normally A allows the firm to call bonds at par value B gives the firm the option to call bonds at market value C allows the firm to call bonds at a price below par value D requires the firm to call bonds at a price above par value ANSWER D 318 Chapter 7 Bond Markets 17 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 ANSWER A 18 Assume U S interest rates are significantly higher than German rates A U S firm wanting to issue bonds 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 a German subsidiary D dollars and making payments from a German subsidiary ANSWER C 19 Bonds that are not secured by specific property are called A chattel mortgage bonds B open end mortgage bonds C debentures D blanket mortgage bonds ANSWER C 20 Bonds that are secured by personal property are called A chattel mortgage bonds B first mortgage bonds C second mortgage bonds D debentures ANSWER A 21 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 ANSWER C Chapter 7 Bond Markets 319 22 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 ANSWER B 23 About of all junk bonds issues are used to finance takeovers A one tenth B one fifth C one third D two thirds ANSWER D 24 bonds have the most active secondary market A Treasury B Zero coupon corporate C Junk D Municipal ANSWER A 25 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 ANSWER C 26 are not primary purchasers of bonds A Insurance companies B Finance companies C Mutual funds D Pension funds ANSWER B 27 Leveraged buyouts are expected to managerial efficiency and the level of corporate debt A reduce reduce B reduce increase C increase increase D increase reduce ANSWER C 320 Chapter 7 Bond Markets 28 As a result of the Financial Institutions Reform Recovery and Enforcement Act FIRREA savings institutions were required to phase out their investment of bonds A zero coupon B junk C municipal D revenue ANSWER B 29 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 these statements are true regarding STRIPS ANSWER B 30 Financial calculator required Harry Potter can purchase bonds with 15 years until maturity a