Chapter 4 - Debt Instruments

Question 1

During periods of rising interest rates, an investor can expect long-term bond prices to _____ more than short-term bond prices.

Answer 1

fall

Question 2

Who derives the MOST benefit from a put provision attached to a bond offering:

Answer 2

bondholders

Question 3

What other terms are used for interest rate?

Answer 3

Coupon rate or nominal yield

Question 4

Some serial maturities are structured so that principal and interest payments represent approximately equal annual payments over the life of the offering.

Answer 4

Level Debt Service

Question 5

Represents a loan or debt obligation of an issuer.

Answer 5

Bond

Question 6

Amount the issuer agrees to pay the investor when the bond matures.

Answer 6

Face Value

Question 7

When the entire bond offering matures on the same date it’s know as a:

Answer 7

term bond issue

Question 8

Interest payments and repayment of principal.

Answer 8

Debt service

Question 9

Principal and interest payments represent approximately equal annual payments over the life of the offering.

Answer 9

Level Debt Service

Question 10

The rate of interest, which generally stays constant throughout the life of the bond.

Answer 10

Fixed coupon rate

Question 11

Responsible for interest payments and repayment of the principal at maturity.

Answer 11

Issuer

Question 12

Offering matures over several years.

Answer 12

Serial Bond Issue

Question 13

A bond quoted at 94 1/2 is trading at 94.5% of its $1,000 par value. Which of these statements are true?
I. The purchase price of the bond is $945.00
II. This bond is trading at a discount.
III. This bond is trading at a premium.
IV. Interest rates have risen since the bond was issued.

Answer 13

I. The purchase price of the bond is $945.00

II. This bond is trading at a discount.

IV. Interest rates have risen since the bond was issued.

Question 14

Who pays for a credit rating?

Answer 14

The issuer

Question 15

As it relates to bonds, what is the concern?

Answer 15

The risk of default.

Question 16

(True or False) A bond’s current yield is also referred to as its basis.

Answer 16

False

Question 17

(True or False) If interest rates are rising, bond prices are falling.

Answer 17

True

Question 18

(True or False) When bond yields are falling, bond prices are falling.

Answer 18

False

Question 19

(True or False) If a bond is trading at par, its coupon rate, current yield, and yield-to-maturity are the same.

Answer 19

True

Question 20

_____ will likely call bonds when interest rates are low.

Answer 20

Issuers

Question 21

(True or False) Issuers will make tender offers for their bonds when interest rates are low.

Answer 21

False

Question 22

(True or False) Bondholders will exercise put options when interest rates are high.

Answer 22

True

Question 23

(True or False) An issuer may call its bonds during call protection periods.

Answer 23

False

Question 24

When does an arbitrage opportunity exist?

Answer 24

If the bond is available at a discount to parity.

Question 25

____ are only necessary for partial calls.

Answer 25

Lotteries