Investing in Bonds Chapter 15 13th Edition Test Bank

Personal Finance, 13e (Kapoor)

Chapter 15 Investing in Bonds

1) A corporate bond is a corporation's written pledge that it will repay a specified amount of money with interest.

Difficulty: 1 Easy

Topic: Bond terminology

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

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Gradable: automatic

2) Maturity dates for corporate bonds generally range from 1 to 10 years.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

3) A bond debenture is a legal document that details all of the conditions relating to a bond issue.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

4) Bond interest payments are a tax-deductible expense for a corporation.

Difficulty: 1 Easy

Topic: Taxation and investments

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

5) Corporate bonds are a form of equity financing that does not have to be repaid.

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

6) A mortgage bond is a corporate bond that is secured by various assets of the issuing firm.

Difficulty: 1 Easy

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

7) A subordinated debenture is a more secure investment than a mortgage bond.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

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Gradable: automatic

8) A convertible bond is a bond that can be exchanged, at the holder's option, for a specified number of shares of the corporation's common stock.

Difficulty: 1 Easy

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

9) In reality, there is no guarantee that convertible bondholders will convert to common stock even if the price of the common stock does increase.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

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Gradable: automatic

10) A sinking fund is a fund to which deposits are made each year for the purpose of redeeming a bond issue.

Difficulty: 3 Hard

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

11) A registered bond is a bond whose ownership is listed in the owner's name by the issuing company.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

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Gradable: automatic

12) Interest checks for registered bonds are generally mailed directly to the bondholder of record.

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

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Gradable: automatic

13) With the use of technology and computers, the book entry form of bond ownership is no longer used.

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

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Gradable: automatic

14) Although unpopular a few years back, more and more U.S. corporations are issuing bearer bonds.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

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Gradable: automatic

15) Professional management spells safety, because an occasional loss incurred with one bond issue is usually offset by gains from other bond issues in the fund's portfolio.

Difficulty: 2 Medium

Topic: Asset allocation and diversification

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

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Gradable: automatic

16) Many financial experts recommend bond funds for very large investors, because these investments offer diversification and professional management.

Difficulty: 2 Medium

Topic: Investment choices and considerations

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

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Gradable: automatic

17) The only way an investor can make money on a bond investment is to hold the bond until maturity.

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

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Gradable: automatic

18) Because bonds are considered debt financing that must be repaid at maturity, a corporation's financial difficulties have little effect on the bond's value between the issue date and the maturity date.

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

19) Treasury bills are issued in minimum units of $10,000 with maturities that range from 10 to 30 years.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

20) Treasury notes are issued in $100 units with a maturity of more than 1 year but not more than 10 years.

Difficulty: 3 Hard

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

21) Treasury bonds are issued in $5,000 units with 10-year maturities.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

22) A general obligation bond is a bond that is repaid from the income generated by the project it is designed to finance.

Difficulty: 3 Hard

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

23) Insured municipal bonds offer slightly lower interest rates than uninsured bonds because of the reduced risk of default.

Difficulty: 2 Medium

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

24) In addition to those issued by the Treasury Department, debt securities are issued by federal agencies, including Fannie Mae, Ginnie Mae, and Freddie Mac.

Difficulty: 1 Easy

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

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Gradable: automatic

25) Although there is a great deal of information on the internet about stock investments, it is impossible to evaluate bonds using the internet.

Difficulty: 2 Medium

Topic: Bond information

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

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Gradable: automatic

26) For government bonds, the bid price is the maximum price that a buyer is willing to pay for a government security.

Difficulty: 2 Medium

Topic: Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

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Gradable: automatic

27) For both Moody's and Standard & Poor's, the first two categories (high-grade and medium-grade) represent investment-grade securities.

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

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Gradable: automatic

28) The current yield for a corporate bond is determined by dividing the annual income amount by the current market value.

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

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Gradable: automatic

29) The yield to maturity takes into account the relationship of a bond's maturity value, the time to maturity, the current price, and the dollar amount of interest.

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

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Gradable: automatic

30) Since 2000, bond yields for high-quality corporate bonds have increased significantly.

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

31) Assume that you purchase a $1,000 corporate bond that pays 8.25 percent interest. What is the dollar amount of interest that you receive each year?

A) $1,000.00

B) $82.50

C) $82.00

D) $80.00

E) $8.25

Explanation: $1,000 × 0.0825 = $82.50

Difficulty: 1 Easy

Topic: Bond coupons and yields

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

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Gradable: automatic

32) You own a $1,000 bond that pays 9 percent interest. What is the amount of interest you will receive each six months?

A) $4.50

B) $9.00

C) $90.00

D) $45.00

E) $22.50

Explanation: $1,000 × 0.09 = 90.00; 90.00 / 2 = $45.00

Difficulty: 1 Easy

Topic: Bond coupons and yields

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

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Gradable: automatic

33) Usually, interest on corporate bonds is paid to the bondholder every:

A) month.

B) three months.

C) six months.

D) nine months.

E) year.

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Understand

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Gradable: automatic

34) Nancy Groom owns a $1,000 corporate bond that pays 6 percent. What is the dollar amount of each semiannual interest payment?

A) $3.00

B) $30.00

C) $60.00

D) $300.00

E) $600.00

Explanation: $1,000 × 0.06 × 6/12 = $30.00

Difficulty: 1 Easy

Topic: Bond coupons and yields

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

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Gradable: automatic

35) Which one of the following statements is true regarding bond characteristics?

A) Corporate bonds do not have a maturity date.

B) The maturity dates for corporate bonds are generally less than a year.

C) Corporate bonds do not have to be repaid.

D) Corporate bonds are a form of equity financing.

E) Long-term corporate bonds have maturities over 10 years.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

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Gradable: automatic

36) The legal conditions for a corporate bond are described in the:

A) trustee contract.

B) bondholder's covenant.

C) corporate charter.

D) bond indenture.

E) bond debenture.

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

37) The financially independent firm that acts as the bondholders' representative is the:

A) chairman of the board.

B) president of the corporation.

C) debenture holder.

D) indenture holder.

E) trustee.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

38) Which one of the following statements is correct regarding bond and stock differences?

A) Stock is a form of debt financing.

B) Stock must be repaid at maturity.

C) Bonds are a form of debt financing.

D) Bonds do not have to be repaid at maturity.

E) Interest payments to bondholders are paid at the discretion of the board of directors.

Difficulty: 2 Medium

Topic: Bond features; Debt financing

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

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Gradable: automatic

39) A bond that is backed only by the reputation of the issuing corporation is called a(n) ________ bond.

A) debenture

B) mortgage

C) indenture

D) preemptive

E) treasury

Difficulty: 1 Easy

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

40) Because of the added security of collateral, the interest rates on ________ bonds are usually lower than interest rates on unsecured debenture bonds.

A) debenture

B) mortgage

C) indenture

D) preemptive

E) subordinated debenture

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

41) A type of bond that is unsecured and gives bondholders a claim secondary to that of other designated bondholders with respect to interest payments, repayment, and assets is called a:

A) debenture bond.

B) mortgage bond.

C) subordinated debenture.

D) preemptive bond.

E) treasury bond.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

42) A legal debt convertible to shares of common stock at the investor's option is called a(n) ________.

A) debenture bond

B) mortgage bond

C) indenture note

D) convertible corporate note

E) convertible bond

Difficulty: 3 Hard

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

43) Sandra Peterson has been thinking about investing in corporate bonds. She is concerned about safety and wants the most secure bond investment possible. She would most likely invest in ________ bonds.

A) debenture

B) mortgage

C) speculative

D) convertible

E) subordinated debenture

Difficulty: 3 Hard

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

44) Which one of the following statements is true?

A) All convertible corporate bonds are quality investments.

B) Convertible bonds often pay 3 to 4 percent more interest than nonconvertible bonds.

C) Because of the conversion feature, investors are attracted to the conservative gain that common stock conversion may provide.

D) There is no guarantee that bondholders will convert to common stock even if the market value of the common stock does increase in value.

E) Even if convertible bondholders convert their investment to common stock, the bondholders still receive interest payments.

Difficulty: 3 Hard

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

45) A $1,000 corporate bond is convertible to 40 shares of the corporation's common stock. What is the minimum price that the stock must obtain before bondholders would consider converting the bond to stock?

A) $10

B) $15

C) $20

D) $25

E) $40

Explanation: $1,000 / 40 = $25

Difficulty: 1 Easy

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Apply

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Gradable: automatic

46) A call feature:

A) allows bondholders to convert their bond to a specified number of shares of common stock.

B) is not available on corporate bonds.

C) allows the corporation to buy outstanding bonds from current bondholders before the maturity date.

D) is only available with government securities.

E) is guaranteed by the corporation.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

47) A provision in the bond indenture that forces the corporation to make arrangements for bond repayment before the maturity date is called a(n) ________ fund.

A) serial

B) sinking

C) debenture

D) indenture

E) money

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

48) To ensure that it has sufficient funds available to redeem a bond issue, a corporation may issue ________ bonds.

A) debenture

B) mortgage

C) high-yield

D) subordinate

E) serial

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

49) XYZ Corporation wants to retire a $60 million bond issue before the maturity date. In order to call the bonds in this issue, the corporation must pay the bondholders the face value plus a premium. What is the typical premium for bonds that have been called?

A) $100

B) $50-$100

C) $20-$75

D) $10-$25

E) $1-$10

Difficulty: 3 Hard

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

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Gradable: automatic

50) Which of the following is the process of spreading your money among several different types of investments to lessen risk?

A) Book entry

B) Professional management

C) Asset allocation

D) Bond laddering

E) Dollar appreciation

Difficulty: 1 Easy

Topic: Asset allocation and diversification

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

51) Today, almost all bond ownership records are maintained by a process called:

A) certified registration.

B) book entry.

C) revenue recognition process.

D) coupon registration.

E) general obligation process.

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

52) To calculate the current yield for a T-bill:

A) divide the maturity value by the interest rate.

B) multiply the maturity value by the interest rate.

C) subtract the discount amount from the maturity value.

D) divide the purchase price by the discount amount.

E) divide the discount amount by the purchase price.

Difficulty: 2 Medium

Topic: Dollar and percentage yields and returns

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

53) Which type of bond is not registered in the investor's name?

A) Revenue

B) General obligation

C) Bearer

D) Zero-coupon

E) Tax-exempt

Difficulty: 1 Easy

Topic: Bond types

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

54) If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally:

A) increase in value.

B) decrease in value.

C) remain unchanged.

D) become worthless.

E) be returned to the corporation.

Difficulty: 3 Hard

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

55) If overall interest rates in the economy fall, a corporate bond with a fixed interest rate will generally:

A) increase in value.

B) decrease in value.

C) remain unchanged.

D) become worthless.

E) be returned to the corporation.

Difficulty: 3 Hard

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

56) What is the approximate market value of a $1,000 corporate bond that pays 6 percent interest when comparable bonds are paying 8 percent interest?

A) $60

B) $80

C) $750

D) $1,000

E) $1,060

Explanation: ($1,000 × 0.06) / 0.08 = 60 / 0.08 = $750

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

57) If the approximate market value for of a $1,000 corporate bond is $1,200 and it pays 6 percent interest, then what are comparable bonds paying?

A) 2 percent

B) 3 percent

C) 4 percent

D) 5 percent

E) 6 percent

Explanation: ($1,000 × 0.06) / 1,200 = 60 / 1,200 = 0.05 = 5 percent

Difficulty: 3 Hard

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

58) Investors purchase corporate bonds:

A) to earn interest income.

B) to gain possible dollar appreciation of bond value.

C) to receive bond repayment at maturity.

D) because they consider them a safer investment than stocks.

E) All of these

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

59) When investors purchase bonds that mature at regular intervals in order to balance risk and return, they are creating a:

A) bond ladder.

B) staggered investment program.

C) incremental investment program.

D) step-up allocation program.

E) guaranteed investment program.

Difficulty: 1 Easy

Topic: Investment strategies and techniques

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

60) Which type of bond would provide a high degree of price stability, because the bonds are not very sensitive to changing interest rates?

A) Discount

B) Short-term

C) Long-term

D) Speculative

E) registered

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

61) If comparable bonds are paying 6 percent and the approximate market price of a $1,000 bond is $850, then what is the annual interest on the bond?

A) $25

B) $51

C) $60

D) $85

E) $120

Explanation: $850 × 0.06 = $51 annual interest

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

62) If comparable bonds are paying 8 percent and the approximate market value of a $1,000 bond is $1,375, then what is the semiannual interest on the bond?

A) $55

B) $80

C) $100

D) $110

E) $137

Explanation: $1,375 × 0.08 = $110 annual interest; $110 / 2 = $55 semiannual interest

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

63) The commissions for purchasing bonds:

A) are stated in plain language as with stocks.

B) are a stated dollar amount for each bond you buy.

C) may be a combination of a stated dollar amount plus an additional commission.

D) include a markdown when buying.

E) include a markup when selling.

Difficulty: 3 Hard

Topic: Bond trading

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

64) Which one of the following statements is false?

A) The U.S. government sells bonds to obtain financing.

B) U.S. government securities carry a decreased risk of default.

C) Interest on U.S. government securities is taxable for federal income tax purposes.

D) Most individual investors that purchase Treasury securities bid competitively.

E) Treasury securities may be purchased directly from banks or brokers.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

65) A government security issued in minimum units of $100 with maturities that are one year or less is called a:

A) subordinated bond.

B) Treasury bill.

C) Treasury note.

D) Treasury bond.

E) savings bond.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

66) Which of the following can be purchased through Treasury Direct at www.treasurydirect.gov?

A) TIPS

B) Treasury bills

C) Treasury notes

D) Treasury bonds

E) All of these

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

67) A government security issued in minimum units of $100 with a 30-year maturity is called a:

A) subordinated bond.

B) Treasury bill.

C) Treasury note.

D) Treasury bond.

E) savings bond.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

68) Dave Johnson's objective was to purchase a government bond that provided some protection against inflation as measured by the consumer price index. To fulfill this objective, John purchased a:

A) T-bill.

B) T-note.

C) T-bond.

D) TIPS.

E) general obligation bond.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

69) A bond backed by the full faith, credit, and unlimited taxing power of the state or local government that issued it is called a ________ bond.

A) debenture

B) mortgage

C) secured

D) general obligation

E) revenue

Difficulty: 2 Medium

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

70) A bond that is repaid from the income generated by the project it is designed to finance is called a:

A) Treasury bill.

B) savings bond.

C) revenue bond.

D) general obligation bond.

E) agency bond.

Difficulty: 1 Easy

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

71) You are a taxpayer in the 24 percent tax bracket and you own a tax-exempt bond that pays 6 percent. What is your taxable equivalent yield?

A) 5.00 percent

B) 6.00 percent

C) 7.89 percent

D) 7.20 percent

E) 14.40 percent

Explanation: 0.06 / (1 − 0.24) = 0.0789 = 7.89 percent

Difficulty: 3 Hard

Topic: Taxation and investments

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

72) June Tavia is trying to calculate the taxable equivalent yield for a municipal bond. If the bond she owns pays 5 percent interest and she is in the 22 percent tax bracket, what is the taxable-equivalent yield (round to nearest percent)?

A) 4 percent

B) 5 percent

C) 6 percent

D) 7 percent

E) 8 percent

Explanation: 0.05 / (1 − 0.22) = 0.0641 = 6.41 percent = 6 percent (rounded)

Difficulty: 3 Hard

Topic: Taxation and investments

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

73) Which one of the following statements is false regarding corporate bonds?

A) It is possible to obtain information about a corporation that issues a bond by accessing the corporation's website on the internet.

B) Price information about corporate bonds is available on the internet.

C) You can research bonds online but you cannot trade them online.

D) There are fewer websites that provide information on bonds as compared to websites that provide information on stocks.

E) Many of the better bond websites charge a fee to access their research.

Difficulty: 2 Medium

Topic: Bond information

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

74) If a bond is quoted in the newspaper at 96, the current price of a $1,000 face value bond is:

A) $9.60.

B) $96.00.

C) $960.00.

D) $1,000.00.

E) $1,096.00.

Explanation: $1,000 ×  96 percent = $960.00

Difficulty: 2 Medium

Topic: Bond valuation; Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

75) If a bond is quoted in the newspaper at 103, the current price of a $1,000 face value bond is:

A) $30.00.

B) $97.00.

C) $970.00.

D) $1,103.00.

E) $1,030.00.

Explanation: $1,000 × 103 percent = $1,030.00

Difficulty: 2 Medium

Topic: Bond valuation; Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

76) Which one of the following statements is true?

A) All metropolitan newspapers contain information on bonds.

B) In bond quotations, prices are given as a percentage of the face value.

C) The face value for most corporate bonds is $5,000.

D) To find the actual price of a corporate bond, you must contact the corporation that originally issued the bond.

E) To find the actual price of a corporate bond, you must call a stockbroker.

Difficulty: 3 Hard

Topic: Bond valuation; Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

77) The minimum price that a seller is willing to receive for a government security is known as the ________ price.

A) bid

B) ask

C) contract

D) government

E) adjusted

Difficulty: 2 Medium

Topic: Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

78) Which of the following sources can be used by an investor to obtain a corporation's annual report?

A) Professional advisory services

B) Corporation's website

C) Phone call to corporation

D) Written request mailed to the corporation

E) All of these sources can be used by an investor to obtain an annual report.

Difficulty: 1 Easy

Topic: Bond information

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

79) The highest bond rating issued by Standard & Poor's is:

A) AAA.

B) Aaa.

C) A+.

D) BB.

E) Aa.

Difficulty: 2 Medium

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

80) The highest bond rating issued by Moody's is:

A) AAA.

B) Aaa.

C) A+.

D) BB.

E) AA.

Difficulty: 2 Medium

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

81) A corporate bond rated B by Moody's would be suitable for:

A) every investor.

B) very cautious investors.

C) speculators.

D) no one because the bond issue is in default.

E) investors who are highly dependent upon the interest income.

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

82) Which bond rating does Standard & Poor's assign to a bond that is in default?

A) A

B) B

C) C

D) D

E) Z

Difficulty: 1 Easy

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

83) According to Moody's, bonds with extremely poor prospects for recovery of principal or interest are rated:

A) A-

B) B-

C) C

D) E

E) F

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

84) What is the current yield for a $1,000 corporate bond that pays 6 percent and has a current market value of $600?

A) 6 percent

B) 8 percent

C) 10 percent

D) 12 percent

E) 14 percent

Explanation: ($1,000 × 0.06) / 600 = 0.10 = 10 percent

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

85) If the current yield for a $1,000 corporate bond is 8 percent and it has a current market value of $900, then what is the annual income generated by the investment?

A) $10

B) $72

C) $80

D) $90

E) $100

Explanation: $900 × 0.08 = $72

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

86) The current yield on a corporate bond takes into account:

A) the bond's face amount.

B) the interest rate paid by the bond.

C) dollar amount of interest.

D) current market value of the bond.

E) All of these

Difficulty: 2 Medium

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

87) If a bond is purchased at a price above the face value, the yield to maturity will be:

A) greater than the stated interest rate.

B) the same as the stated interest rate.

C) less than the stated interest rate.

D) zero.

E) of no significance.

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

88) If a bond is purchased at a price below the face value, the yield to maturity will be:

A) greater than the stated interest rate.

B) the same as the stated interest rate.

C) less than the stated interest rate.

D) zero.

E) of no significance.

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

89) Dave Harris has just purchased a bond with a face value of $1,000 that pays 4 percent. The purchase price of the bond was $950, and the bond will mature in 5 years. What is the yield to maturity for this bond (round to the nearest tenth of a percent)?

A) 4.0 percent

B) 6.0 percent

C) 5.1 percent

D) 8.2 percent

E) 9.0 percent

Explanation: [($1,000 × 4%) + {($1,000 − $950) / 5}] / [($950 + $1000) / 2] = (40 +10) / 975 = 0.051 = 5.1 percent

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

90) Dave Harris purchased a single bond last year for $987. He knows he will receive $1,000 on March 1, 2026. This date is referred to as the ________ date.

A) maturity

B) purchase

C) record

D) ex-dividend

E) declaration

Difficulty: 1 Easy

Topic: Bond terminology

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

91) Which of the following are owned by a company and can be used to secure a mortgage bond?

A) Dividends

B) Bond indentures

C) Liabilities

D) Interest payments

E) Assets

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

92) Why do corporations sell bonds?

A) To increase their financial leverage

B) To pay for major purchases

C) Because they are finding it difficult or impossible to sell stock

D) Because the interest is tax-deductible

E) All of these

Difficulty: 2 Medium

Topic: Debt financing

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

93) Tom McCallister buys a bond that the company can retire before maturity if they wish. What type of bond has Tom purchased?

A) Debenture bond

B) Subordinated debenture bond

C) Convertible bond

D) Callable bond

E) High-yield bond

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

94) Frank Riley just purchased a bond that is unsecured and is secondary to other unsecured bonds with respect to interest payments or repayment at maturity. What type of bond has Frank purchased?

A) High-yield

B) Subordinated debenture

C) Convertible

D) Callable

E) Municipal

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

95) Dick Dowen just bought a bond that is only secured by the reputation of the issuing corporation. What type of bond has Dick purchased?

A) Debenture

B) Mortgage

C) Convertible

D) Callable

E) High-yield

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

96) Doug Emery purchased a bond that can be exchanged for a set number of shares of the issuer's common stock. What type of bond has Doug purchased?

A) Debenture

B) Subordinated debenture

C) Convertible

D) Callable

E) High-yield

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

97) Which is true of convertible bonds?

A) They pay both interest and dividends simultaneously.

B) They pay no interest payments.

C) They can be repurchased by the issuing corporation before the maturity date.

D) They must be carefully evaluated like all potential investments.

E) They are always quality investments.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

98) To calculate the taxable equivalent yield on a municipal bond:

A) divide your tax rate by the result of 1.0 minus your tax-exempt rate

B) multiply your tax rate by your tax-exempt rate of return

C) divide your tax rate by your tax-exempt rate of return

D) divide the tax-exempt rate of return by your tax rate

E) divide the tax-exempt rate of return by the result of 1.0 minus your tax rate

Difficulty: 2 Medium

Topic: Taxation and investments; Dollar and percentage yields and returns

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

99) What is bond laddering?

A) Buying only long-term bonds

B) Buying only short-term bonds

C) Buying bonds with maturity dates spread out over a number of years

D) Combining stock and bond investments

E) Exchanging bonds for shares of stock

Difficulty: 2 Medium

Topic: Investment strategies and techniques

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

100) Which one of the following bonds would likely have the lowest risk?

A) Treasury bill

B) Municipal bond

C) Common stock

D) Corporate bond

E) Junk bond

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

101) Treasury bills:

A) are rated by Moody's.

B) pay interest every six months.

C) are long-term securities issued by the federal government.

D) are discounted securities.

E) pay a higher interest rate than corporate bonds.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

102) Which one of the following is issued by state and local governments?

A) Treasury bond

B) Treasury bill

C) Municipal bond

D) Corporate bond

E) Common stock

Difficulty: 1 Easy

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

103) Which one of the following represents a bond that generally lacks characteristics of a safe investment and is subject to high credit risk?

A) Treasury bond

B) Bond rated B by Standard and Poor's

C) Bond rated AAA by Standard and Poor's

D) Insured municipal bond

E) Treasury bill

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

104) Serial bonds are bonds of a single issue that:

A) will pay no interest payments.

B) will mature on the same date.

C) will mature on different dates.

D) cannot be called.

E) will all mature ten years from the date of issue.

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

105) Which of the following terms applies to a bond issue for which the corporation puts money aside at regular intervals for the purpose of redeeming the bonds?

A) Serial

B) Default

C) Sinking fund

D) Low-coupon

E) Convertible

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

106) Scott Turner has a bond with 10 years to maturity, a face value of $1,000, annual interest of $60, and a market price of $600. What is the yield-to-maturity on this bond?

A) 6.0 percent

B) 10.0 percent

C) 11.0 percent

D) 11.5 percent

E) 12.5 percent

Explanation: [$60 + {($1,000 − $600) / 10}] / [($600 + $1,000) / 2] = (60 + 40) / 800 = 0.125 = 12.5 percent

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

107) Elizabeth Cherry has a bond that has 10 years to maturity, a face value of $1,000, an 7% interest rate, and a market price of $1,100. What is the dollar amount of annual interest on this bond?

A) $20

B) $70

C) $100

D) $110

E) $200

Explanation: $1,000 × 7% = $70

Difficulty: 1 Easy

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Analyze

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

108) Which of the following can cause the price of a corporate bond to fluctuate until the maturity date?

A) Changes in overall interest rates in the economy

B) The financial condition of the company issuing the bond

C) The factors of supply and demand

D) An upturn or downturn in the economy

E) All of these

Difficulty: 3 Hard

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

109) Which of the following statements is true with respect to U.S. Treasury securities?

A) Treasury bills are issued in minimum units of $10,000 with maturities that range from 10 to 30 years.

B) Typical maturities for treasury notes are 2, 3, 5, 7, and 10 years.

C) Treasury bonds are issued in $5,000 units with 10-year maturities.

D) The Treasury no longer issues Treasury bills.

E) Treasury bills generally pay a higher interest rate than Treasury bonds.

Difficulty: 3 Hard

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

110) The quality rating given by Standard & Poor's to bonds that are highly speculative and near default is:

A) high-grade.

B) problematic or default.

C) investment-grade.

D) medium-grade.

E) unrated.

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

111) If the terms of the sinking fund provision are not met, the ________ may take legal action against the company on behalf of the bondholders.

A) stockholder

B) arbitrator

C) mediator

D) trustee

E) guardian

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

112) The ________ is the dollar amount the bondholder will receive at the bond's maturity.

A) annual interest

B) semiannual interest

C) premium

D) face value

E) commission

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

113) Which of the following factors is used to calculate the total return on the sale of a bond?

A) Commission when bond was purchased

B) Interest earned on the bond

C) Cost of the bond when purchased

D) Dollar return when the bond was sold

E) All of these

Difficulty: 2 Medium

Topic: Dollar and percentage yields and returns

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

114) For 2018, bond yields for high-quality corporate bonds have been approximately how much?

A) 2%

B) 4%

C) 5%

D) 7%

E) 10%

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

115) Which of the following statements is not true about Treasury Inflation-Protected Securities?

A) They are currently sold with 5-, 10-, or 30-year maturities.

B) The amount of principal increases with inflation and decreases with deflation.

C) They pay interest twice a year, at a fixed rate.

D) They can be held until maturity or sold before maturity.

E) Interest income and growth in principal are exempt from federal income tax.

Difficulty: 3 Hard

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

116) Maturity dates for intermediate term corporate bonds generally range from 3 to ________ years.

A) 10

B) 15

C) 20

D) 25

E) 30

Difficulty: 1 Easy

Topic: Bond features

Learning Objective: 15-01 Describe the characteristics of corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

117) For Moody's and Standard & Poor's, the first ________ bond-rating categories represent investments suitable for conservative investors who want a safe investment that provides a predictable source of income.

A) two

B) three

C) four

D) five

E) six

Difficulty: 2 Medium

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

118) For government bonds, the difference between the bid price and the ask price is called the:

A) dirty price.

B) asked price.

C) spread.

D) clean price.

E) quoted price.

Difficulty: 1 Easy

Topic: Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

119) In the U.S., bond price quotations are based on the price of a bond with no accrued or earned interest, which is called the:

A) dirty price.

B) asked price.

C) spread.

D) clean price.

E) coupon price.

Difficulty: 1 Easy

Topic: Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

120) In the U.S., the ________ for a bond represents the price of the bond plus accrued interest earned since the last interest payment date.

A) dirty price

B) asked price

C) spread

D) clean price

E) coupon price

Difficulty: 1 Easy

Topic: Bond trading

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

121) A type of bond that is still issued by corporations in foreign countries, but is no longer issued by U.S. corporations is called a:

A) registered bond.

B) bearer bond.

C) registered coupon bond.

D) serial bond.

E) mortgage bond.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

122) Which of the following is a fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue?

A) Call feature

B) Sinking fund

C) Deposit fund

D) Premium fund

E) Savings account

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

123) ________ are bonds of a single issue that mature on different dates.

A) Convertible bonds

B) High-yield bonds

C) Mortgage bonds

D) Serial bonds

E) Debenture bonds

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

124) Corporate bonds that pay higher interest but also have a higher risk of default are called:

A) convertible bonds.

B) high-yield bonds.

C) mortgage bonds.

D) serial bonds.

E) callable bonds.

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

125) High-yield (junk) bonds are sold by companies:

A) with a poor earnings history.

B) with a questionable credit record.

C) with lower ratings by major rating services.

D) that are newer and have unproven ability to increase sales and earn profits.

E) All of these

Difficulty: 2 Medium

Topic: Bond types

Learning Objective: 15-02 Discuss why corporations issue bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

126) With a ________, only the registered owner can collect the principal at maturity, but interest payments can be paid to anyone who presents one of the detachable coupons.

A) registered coupon bond

B) bearer bond

C) corporate bond

D) money market account

E) savings bond

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

127) Anyone who is in physical possession of a ________ can collect interest payments and the face value of the bond at maturity regardless of whether or not they are the rightful owner.

A) corporate bond

B) registered coupon bond

C) bearer bond

D) money market account

E) savings bond

Difficulty: 2 Medium

Topic: Bond features

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

128) The Treasury Department currently sells T-bills with ________ maturities.

A) 4-week

B) 13-week

C) 26-week

D) 52-week

E) All of these

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

129) When a Treasury bill matures, the investor receives:

A) a premium.

B) the interest only.

C) the purchase price.

D) the face value.

E) a discount.

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

130) Cynthia Smith is concerned about ABC company's ability to make future interest payments on their bonds. What ratio can help her evaluate this concern?

A) Bond price calculation

B) Current yield calculation

C) Yield to maturity

D) Times interest earned

E) Dividend yield

Difficulty: 2 Medium

Topic: Bond valuation; Investment risks and measures

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

131) Mary Smith would like to invest in 10 T-bills that will have a maturity value of $1,000. The bills have a stated interest rate of 2 percent. What would be the purchase price of these T-bills?

A) $960

B) $970

C) $980

D) $990

E) $1,000

Explanation: $1,000 × 0.02 = 20; $1,000 − 20 = $980

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

132) Which of the following is not true regarding Federal Agency debt issues from Fannie Mae or Ginnie Mae?

A) Agency debt issues do not have the same guarantee as U.S. Treasury securities.

B) Agency debt issues often have a slightly higher interest rate than U.S. Treasury securities.

C) Agency debt issues are callable before the maturity date.

D) Investing in agency debt issues is simpler than buying and selling U.S. Treasury securities.

E) Agency debt issues are not sponsored by the U.S. government.

Difficulty: 2 Medium

Topic: Investment choices and considerations; U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal, state, and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

133) Which website has a brochure entitled, "Saving and Investing: A Roadmap to Your Financial Security Through Saving and Investing?"

A) Apple

B) Google

C) Bing

D) Securities and Exchange Commission

E) Internal Revenue Service

Difficulty: 1 Easy

Topic: Bond information

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: automatic

134) When investing in bonds, there are a lot of factors to consider. To help you decide if a bond is a good investment that will help you reach your financial goals, list 4 steps you can take.

1. Determine what type of bond you want.

2. To help narrow the field of potential bond investments, use a bond screener like Yahoo! Screener.

3. Dig in deeper to find more information.

4. Use a financial calculator to determine if a bond is a good investment or not.

Difficulty: 2 Medium

Topic: Bond information

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

135) Define four of these six terms.

(A) corporate bond (B) bond indenture (C) trustee (D) mortgage bond (E) debenture bond (F) convertible bond

Difficulty: 2 Medium

Topic: Bond terminology

Learning Objective: 15-01 Describe the characteristics of corporate bonds.; 15-02 Discuss why corporations issue bonds.

Bloom's: Remember

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

136) What are the three ways to make money with a bond investment?

1. Interest income

2. Possible dollar appreciation of bond value

3. Bond repayment at maturity

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

137) How do interest rates in the economy affect the price of a corporate bond?

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

138) Bonds are generally considered a relatively safe investment. How is it possible to lose money on bonds?

Difficulty: 2 Medium

Topic: Bond valuation

Learning Objective: 15-03 Explain why investors purchase corporate bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

139) What is the difference between a U.S. government Treasury bill, Treasury note, and Treasury bond?

Difficulty: 2 Medium

Topic: U.S. Treasury securities

Learning Objective: 15-04 Discuss why federal; state; and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

140) Corporate and Treasury bonds generally produce more interest revenue than municipal bonds. Why do investors choose to buy municipal bonds?

Municipal bonds exempt from federal taxation are generally exempt from state and local taxes only if you live in the state where they are issued. Although the interest income on municipal bonds may be exempt from taxation, you may have to pay both federal and state taxes on capital gains when you sell a municipal bond before maturity and at a profit, just like capital gains on other investments sold at a profit.

Difficulty: 2 Medium

Topic: State and local government securities

Learning Objective: 15-04 Discuss why federal; state; and local governments issue bonds and why investors purchase government bonds.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

141) You are trying to evaluate two bond issues. One bond issue is rated "A" by Moody's; the other is rated "B." How important are the bond ratings issued by Moody's Investors Service? Based on your feedback, would you purchase the "A" bond or the "B" bond?

Difficulty: 3 Hard

Topic: Bond ratings

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

142) If your primary goal is current yield, which one of these bonds is the wiser investment? Bond A: $1,000 corporate bond that pays 6 percent and has a current market value of $700; or Bond B: $1,000 corporate bond that pays 7.25 percent and has a current market value of $800?

Bond B current yield = ($1,000 × 0.0725)/$800 = 0.0906 = 9.06%;

Bond B has a marginally better current yield.

Difficulty: 3 Hard

Topic: Bond coupons and yields

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Understand

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual

143) Cynthia Smith is evaluating a bond investment in ABC company. She is concerned about the corporation's ability to make future interest payments. Determine the company's times interest earned ratio if the company has operating income before interest and taxes of $12,235 million and interest expense of $1,025 million in 2017 and interpret it.

Difficulty: 2 Medium

Topic: Bond valuation; Investment risks and measures

Learning Objective: 15-05 Describe how to evaluate bonds when making an investment.

Bloom's: Apply

Accessibility: Keyboard Navigation; Screen Reader Compatible

Gradable: manual