Ch. 5 S7

Question 1

What yield would be disclosed for a bond purchased at a premium and callable at a premium?

Answer 1

The lower of the YTM or YTC

Question 2

Are prerefunded bonds quoted on a YTM basis or a YTC basis?

Answer 2

YTC

Question 3

Are serial or term bonds more likely to have a sinking fund?

Answer 3

Term bonds are more likely to have a sinking fun.

Question 4

What is a formula for calculating a bonds current yield?

Answer 4

Annual Interest ➗ Current Market Price

Question 5

A bond trading at a price below par is a ____________ bond.

Answer 5

Discount

Question 6

A bond has a 12% coupon and is trading for $1,200. What is the realistic YTM for this bond?

Answer 6

YTM must be less than 10% since the current yield ($120 / $1,200) is 10%

Question 7

T/F: Bonds with call features have higher yields, while bonds with put features have lower yields.

Answer 7

T

Question 8

How is interest on corporate bonds for tax purposes?

Answer 8

Fully taxable (state, local, federal)

Question 9

Bonds rated BB (Ba) or lower are considered _______________ bonds.

Answer 9

Speculative/junk

Question 10

When discussing a bond, the YTM may also be referred to as _________.

Answer 10

Basis

Question 11

The _____________ represents the amount above par that issuers pay to redeem bonds early.

Answer 11

Call premium

Question 12

Accrued interest on municipal bonds is calculated using ______ days in the month and _____ days in the year.

Answer 12

30 days ; 360 days

Question 13

Rank in order from highest to lowest, the three yields on a bond priced at a discount.

Answer 13

YTM, CY, NY

Question 14

What yield would be disclosed for a bond purchased at a premium and callable at par?

Answer 14

YTC

Question 15

The money held in escrow from a prerefunding is invested in _________________.

Answer 15

U.S Government Securities

Question 16

$______ is the par value for bonds.

Answer 16

$1,000

Question 17

Accrued interest on T-notes and T-bonds is calculated using _______ days in the month and ______ days in the year.

Answer 17

Actual days in the month ; 365 days in the year

Question 18

T/F: Investors may exercises bonds call privilege any time after issuance.

Answer 18

F; only issuers may exercise the call proline after the call protection period has ended.

Question 19

May bonds be called early due to an event which destroys the source of revenue backing the bond?

Answer 19

Yes, when using a catastrophe call

Question 20

Into what does an issuer periodically set aside money for retiring debt?

Answer 20

Sinking fund

Question 21

Bonds rated ________ and higher are considered investment grade.

Answer 21

BBB (for S&P and Fitch) and Baa (for Moodys)

Question 22

Rank in order from highest to lowest, the three yields on a bond priced at a premium.

Answer 22

NY, CY, YTM

Question 23

Bond holders are also referred to as _________________.

Answer 23

Creditors

Question 24

What does one basis point represent as a percentage?

Answer 24

0.01%

Question 25

______________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.

Answer 25

Refunding

Question 26

A bond trading at a price of $1,000 is a ______ bond.

Answer 26

Par

Question 27

What is a level debt service?

Answer 27

Each years debt service payments remaining generally equal

Question 28

What yield would be disclosed for a bond sold at a discount?

Answer 28

YTM

Question 29

What is the original issue that is being refunded called?

Answer 29

Prerefunded bonds

Question 30

The process of adjusting the basis of a premium bond down to par over its life is called _____________.

Answer 30

Amortization

Question 31

When executing a prerefunding, into what account would the new issue proceeds be placed?

Answer 31

An escrow account managed by a trustee

Question 32

A type of maturity where all bonds mature on one specific date is called a ________ bond.

Answer 32

Term

Question 33

What yield would always be disclosed for a bond that has been prerefunded?

Answer 33

YTC

Question 34

A bond trading at a price above par is a _____________ bond.

Answer 34

Premium

Question 35

Debt service represents to total of all _____________ and __________ payments.

Answer 35

Principal and interest

Question 36

T/F: Interest paid on corporate bonds is entirely tax-exempt.

Answer 36

F; corporate bonds interest is taxed at the federal, state, and local level.

Question 37

A bond with an 8% coupon would pay how much interest a year?

Answer 37

$80

Question 38

Calculate the price of a corporate bond quote at 98 3/4.

Answer 38

$987.50

Question 39

What is the maturity type where a portion of principal is retired each year?

Answer 39

Serial bond

Question 40

How does S&P and Moodys further differentiate their ratings?

Answer 40

S&P uses + or - and Moodys uses 1,2,3

Question 41

What can be determined if given the following bond information? 7% bond due 6/1/20XX, yielding 8.7%.

Answer 41

$70 interest ($35 paid on 6/1 and 12/1), matures on June 1, 20XX, is discounted since the YTM (8.7%) is above the Nominal Yield (7%)

Question 42

What is the highest credit rating?

Answer 42

AAA for S&P and Fitch and Aaa for Moodys

Question 43

What is the impact on bonds that have been prerefunded?

Answer 43

Credit is improved and the issue is considered defeased for the issuer.

Question 44

T/F: When interest rates go up, bond prices go down, and when interest rates go down bond prices go down.

Answer 44

F; inverse relationship

Question 45

What does a put feature on a bond allow?

Answer 45

Bond holders may put (redeem) the bond back to the issuer prior to maturity.

Question 46

What does YTM take into account that current yield does not?

Answer 46

Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money

Question 47

Refunding would most likely occur when interest rates have ____________.

Answer 47

Fallen

Question 48

Describe call protection.

Answer 48

The numbers of years after issuance during which bonds may not be called by the issuer

Question 49

What are two synonymous terms for a bonds interest rate?

Answer 49

Coupon rate and nominal yield

Question 50

What is the IRS method for accreting the basis of a bond?

Answer 50

Constant yield or constant interest method

Question 51

Accrued interest on corporate bonds is calculated using ______ days in the month and _____ days in the year.

Answer 51

30 days ; 360 days

Question 52

Bond interest is stated ________ and paid __________.

Answer 52

Annually ; semiannually