Chapter 7 practice questions Flashcards
The bond rating of a security reflects the
likelihood the lender/borrower will be repaid by the borrower/issuer.
The two best known bond rating services are
Standard & Poor and Moody’s
What is the highest bond rating assigned by Standard & Poor’s?
AAA
The lowest rating for an investment grade bond assigned by Moody’s is
Baa`
Bonds rated as “highly speculative” are
junk bonds
Once a bond rating is assigned, it
can change as the financial position of the issuer changes.
commercial paper is
unsecured short-term debt issued by corporations and governments.
Bonds issued by the U.S. Treasury are referred to as benchmark bonds because
liquid and free of default risk
the risk spread is
the difference between the bond’s yield and the yield on a U.S. Treasury bond of the same maturity.
The risk structure of interest rates says
lower rated bonds will have higher yields.
Which one of the following is true?
Long-term bond yields move together but short-term yields do not.
Short-term bond yields move together but long-term yields do not.
U.S. Treasury Bill yields are lower than the yields on commercial paper.
Long-term bond yields are usually the same as short-term yields.
U.S. Treasury Bill yields are lower than the yields on commercial paper.
Municipal bonds are issued by
states and cities and their interest is exempt from U.S. government taxation.
Which fact about the term structure is the expectations theory able to explain?
why long-term bonds usually are less liquid than short-term bonds with the same default risk
A company that continues to have strong profit performance during an economic downturn when many other companies are suffering losses or failing should see
bond rating be maintained or increased
Bonds with the same tax status and ratings
can have different yields due to different maturities
