FINANCE

Chapter 07

Valuing Bonds

 

BA 540 Chapter 07 – Valuing Bonds

BA/540 Chapter 07 – Valuing Bonds

BA540 Chapter 07 – Valuing Bonds

BA-540 Chapter 07 – Valuing Bonds

BA 540 Chapter 07 – ValuingBonds

Multiple Choice Questions
1. Which of these statements is false?
A. Bonds are more important capital sources than stocks for companies and governments.
B. Some bonds offer high potential for rewards and, consequently, higher risk.
C. The bond market is larger than the stock market.
D. Bonds are always less risky than stocks.

 

2. Bonds are issued by which of the following?
A. corporations
B. federal government or its agencies
C. state and local governments
D. all of these

 

3. Which of these statements answers why bonds are known as fixed income securities?
A. Many investors on fixed incomes buy them.
B. Investors know how much they will receive in interest payments.
C. Investors will not receive their principal when the bond’s term is up.
D. All of these

 

4. Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?
A. debenture
B. enforcement codes
C. indenture
D. prospectus

 

5. Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay?
A. call premium
B. maturity date
C. par or face value
D. time to maturity value

 

6. To compensate the bondholders for getting the bond called, the issuer pays which of the following?
A. call feature
B. call premium
C. coupon rate
D. original issue premium

 

7. This determines the dollar amount of interest paid to bondholders.
A. original issue discount
B. call premium
C. coupon rate
D. market rate

 

8. Bond prices are quoted in terms of which of the following?
A. original issue discount
B. percent of par value
C. coupon rate in dollars
D. market rate in dollars

 

9. Which of the following are main issuers of bonds?
A. U.S. Treasury bonds
B. Corporate bonds
C. Municipal bonds
D. All of these

 

10. Which of the following statements is true?
A. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level.
B. Interest payments paid to corporate bond holders are not taxed at the federal level.
C. Interest payments paid to corporate bond holders are not taxed at the state level.
D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

 

11. Which of the following issues Treasury Inflation Protected Securities (TIPS)?
A. U.S. Treasury
B. Corporations
C. Municipalities
D. Nonprofits

 

12. Which of the following is true regarding U.S. Government Agency Securities?
A. They carry the federal government’s full faith and credit guarantee.
B. They do not carry the federal government’s full faith and credit guarantee.
C. They are insured by the FDIC.
D. They are treated the same as U.S. Treasury bonds with regard to the federal government’s full faith and credit guarantee.

 

13. Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?
A. asset-backed securities
B. credit quality securities
C. debentures
D. junk bonds

 

14. Which of the following is NOT a factor that determines the coupon rate of a company’s bonds?
A. The amount of uncertainty about whether the company will be able to make all the payments.
B. The term of the loan.
C. The level of interest rates in the overall economy at the time.
D. All of these are factors that determine the coupon rate of a company’s bonds.

 

15. Which of the following bonds makes no interest payments?
A. a bond whose coupon rate is equal to the market interest rates
B. a bond whose coupon rates are greater than market interest rates
C. a bond whose coupon rates are less than the market interest rates
D. zero coupon bond

 

16. Which of the following is a true statement?
A. If interest rates fall, U.S. Treasury bonds will have decreasing values.
B. If interest rates fall, corporate bonds will have decreasing values.
C. If interest rates fall, no bonds will enjoy rising values.
D. If interest rates fall, all bonds will enjoy rising values.

 

17. Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?
A. credit quality risk
B. interest rate risk
C. liquidity rate risk
D. reinvestment rate risk

 

18. Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?
A. credit quality risk
B. interest rate risk
C. liquidity rate risk
D. reinvestment rate risk

 

19. Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same?
A. credit quality risk
B. interest rate risk
C. liquidity of interest rate risk
D. term structure of interest rates

 

20. A bond’s current yield is defined as
A. the bond’s annual coupon rate divided by the bond’s par value.
B. the bond’s annual coupon rate divided by the market interest rate.
C. the bond’s annual coupon rate divided by the bond’s current market price.
D. the bond’s annual coupon rate divided by the bond’s original issue price.

 

21. Which of the following is an important advantage to the issuer of a bond with a call provision?
A. They are able to avoid interest rate risk.
B. They are able to avoid reinvestment rate risk.
C. They are able to reduce their credit risk.
D. They allow for refinancing opportunities.

 

22. Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?
A. They are able to avoid interest rate risk.
B. They are able to avoid reinvestment rate risk.
C. They are able to offer reduced credit risk as they are backed by the federal government.
D. They are tax exempt—at least at the federal level.

 

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