chapter 6 questions i mess up Flashcards
A Swedish company recently issued a bond denominated in US dollars. The price of the bond is least likely impacted by:
A
US interest rates.
B
the exchange rate.
C
Swedish interest rates.
C
Swedish interest rates.
A company issues a series of bonds worth €100,000,000, maturing in 2025. These bonds pay coupons of 5% semiannually, paid in cash or an equivalent-value zero-coupon bond maturing in 2025. This bond is most accurately characterized as a(n):
A
index-linked bond.
B
payment-in-kind bond.
C
deferred coupon bond.
B
payment-in-kind bond.
An investment bank that underwrites a bond issue most likely:
A
buys and resells the newly issued bonds to investors or dealers.
B
acts as a broker and receives a commission for selling the bonds to investors.
C
incurs less risk associated with selling the bonds than in a best-efforts offering.
A
buys and resells the newly issued bonds to investors or dealers.
From the perspective of bondholders, an advantage of a callable bond relative to an otherwise equivalent option-free bond is most likely that the callable bond offers:
A
a higher yield.
B
more predictable cash flows.
C
greater protection against reinvestment risk.
A
a higher yield.
When issuing debt, a company may use a sinking fund arrangement as a means of reducing:
A
credit risk.
B
inflation risk.
C
interest rate risk.
A
credit risk.
The bond issue trading at the highest bid–offer spread is most likely a:
A
recently issued sovereign bond.
B
seasoned investment-grade corporate bond.
C
recently issued investment-grade corporate bond.
B
seasoned investment-grade corporate bond.
Bonds of less frequent corporate issuers or more seasoned bonds of frequent issuers are rarely traded, leading dealers to quote bid–offer spreads of at least 10–20 basis points or more for small size
Three bonds with the following characteristics are available on the open market:
Issued October 1, 20X3, maturing in 12 years
–> 5.9% coupon rate
–> $100,000 face value
Bond A is convertible, Bond B is callable, Bond C has no options.
All other features of the bonds are identical, including seniority, collateral, and issuer.
Which bond will be the most likely trade at the lowest price?
A
Bond A
B
Bond B
C
Bond C
B
Bond B
Which of the following is a benefit to a bank that makes short-term loans and issues asset-backed commercial paper?
a) The bank receives commercial paper when the ABCP is issued.
b) Capital costs are reduced by providing undrawn backup liquidity instead of holding the short-term loans to maturity.
c) The bank purchases a liquid, short-term note with interest and principal payments from a short-term loan portfolio to which it would otherwise not have direct access.
b) Capital costs are reduced by providing undrawn backup liquidity instead of holding the short-term loans to maturity.
The bank will reduce capital costs by providing undrawn backup liquidity instead of holding the short-term loans to maturity
Ewing Corp. is a large corporation that has an existing relationship with Sycamore Bank. Ewing is seeking short-term financing from a committed line of credit; however, Sycamore will offer only an uncommitted line of credit. Which of the following best supports Sycamore’s decision?
a) Sycamore will receive an upfront commitment fee on the uncommitted line of credit.
b) Sycamore will require less bank capital for the uncommitted line than for the committed line of credit.
c) Sycamore can form a syndicate to reduce the amount of committed capital needed under an uncommitted line of credit.
b) Sycamore will require less bank capital for the uncommitted line than for the committed line of credit.
Which of the following statements about high yield is correct?
a) High-yield investors benefit from higher bond prices as issuer-specific credit spreads fall, but in the case of callable debt, these gains are capped at the original purchase price.
b) Issuers in the high-yield market seek to retain financial flexibility by borrowing under leveraged loans with prepayment features or issuing bonds with contingency features.
c) Issuers who believe that their creditworthiness will decline frequently choose to issue callable debt, because the value of this contingency feature rises as a firm’s borrowing costs rise.
b) Issuers in the high-yield market seek to retain financial flexibility by borrowing under leveraged loans with prepayment features or issuing bonds with contingency features.
Balance sheets of government entities are unlikely to include:
a) FX reserves.
b) long-term debt.
c) accrual of unfunded liabilities.
c) accrual of unfunded liabilities.
Public sector financial accounting standards vary widely and are often prepared using cash, rather than accrual-based, principles, typically excluding such items as the depreciation of fixed public goods, such as federal highways, or the accrual of unfunded liabilities, such as government pension obligations
In practice, which of the following applies as it relates to sovereign government financing?
a) Taxpayers smooth consumption over time, saving expected future taxes today for future payment.
b) Taxpayers form rational expectations that today’s tax cuts will result in future tax increases and pass on tax savings to descendants.
c) Governments seek to minimize interest rate and rollover risks by distributing debt across maturities while issuing debt in regular, predictable intervals.
c) Governments seek to minimize interest rate and rollover risks by distributing debt across maturities while issuing debt in regular, predictable intervals.
Which of the following is correct regarding the single-price auction process?
a) Bidders include only dealers and institutional investors.
b) Competitive bidders who bid higher than the stop yield are allocated securities.
c) All non-competitive bids are accepted, while competitive bids are ranked starting at the lowest yield (highest bond price).
c) All non-competitive bids are accepted, while competitive bids are ranked starting at the lowest yield (highest bond price).
A non-sovereign bond issued to fund public goods and services in the non-sovereign’s limited jurisdiction that is repaid from local tax cash flows is referred to as:
a) a GO bond.
b) a revenue bond.
c) an agency bond.
a) a GO bond.
General obligation bonds are used to fund public goods and services in the non-sovereign’s limited jurisdiction and are repaid from local tax cash flows.
Quasi-governmental bonds are most likely:
a) issued by a national government in a foreign currency.
b) issued by a governmental body below the national level.
c) repaid from cash flows generated by the issuer or from the project being financed.
c) repaid from cash flows generated by the issuer or from the project being financed.
A sovereign government would most likely be motivated to issue floating-rate debt in order to:
A
eliminate interest rate risk.
B
reduce its own exposure to interest rate risk.
C
reduce investors’ exposure to interest rate risk.
C
reduce investors’ exposure to interest rate risk.
Governments have been motivated to issue floating-rate debt in response to investor demand for sovereign bonds that carry less interest rate risk than the fixed-rate debt that is most commonly issued by governments.
A bond issued by a local government authority, typically without an explicit funding commitment from the national government, is most likely classified as a:
A
sovereign bond.
B
quasi-government bond
C
non-sovereign government bond.
C
non-sovereign government bond.
A corporate issuer of commercial paper would most likely use a backup line of credit to mitigate:
A
credit risk.
B
rollover risk.
C
currency risk.
B
rollover risk.
Issuing commercial paper is a form of short-term borrowing. Maturities range from overnight to one year, but are typically less than three months. When commercial paper matures, the borrower must either find a new source of financing or re-issue its commercial paper (“roll it over”).
All else equal, which of the following factors would most likely reduce the repo rate for a repurchase agreement?
A
Lengthening the maturity
B
Using widely-available collateral
C
Requiring physical delivery of collateral
C
Requiring physical delivery of collateral
Requiring collateral delivery gives the lender possession of collateral in case of default and greater assurance of repayment, resulting in a lower repo rate.
Which of the following is least likely to be used by banks as a source of short-term funds?
A
Retail deposits
B
Common stock
C
Certificates of deposit
B
Common stock
Compared to a multiple-price auction process for a sovereign bond issue, a single-price auction is most likely to result in:
A
a wider range of bids a lower cost of funds.
B
a narrower range of bids a lower cost of funds.
C
a narrower range of bids a higher cost of funds.
A
a wider range of bids a lower cost of funds.
Exceptions to the maturity effect exist for bonds that have:
a) long maturities, make small coupon payments, and trade at a discount.
b) short maturities, have high coupon rates, and trade at a discount.
c) long maturities, have high coupon rates, and trade at a premium.
a) long maturities, make small coupon payments, and trade at a discount.
A bond is traded in between its coupon payment dates. Which of the following is true?
a) The buyer must pay the full price plus the accrued interest.
b) The bond’s quoted price is greater than its flat price.
c) Accrued interest is not included in the flat price.
c) Accrued interest is not included in the flat price.
