Unit 2 Quiz Deck Flashcards
When selling a bond, the issuer is taking
A) a creditors position.
B) a loaners position.
C) a borrower’s position.
D) an equity position.
C) a borrower’s position.
Issuers of bonds are borrowing money from the purchaser of the bond.
T-bills are delivered in
A) bearer form.
B) registered as to principal only form.
C) book entry.
D) physical certificates.
C) book entry.
All U.S. government issues are delivered in book entry.
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy
A) noncallable bonds.
B) callable bonds.
C) neither callable nor noncallable bonds.
D) either callable or noncallable bonds.
A) noncallable bonds.
If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity.
Which of the following statements is most accurate about feature benefits?
A) The put feature benefits both the issuer and investor.
B) The put feature benefits the issuer; the call feature benefits the investor.
C) The call feature benefits both the issuer and investor.
D) The call feature benefits the issuer; the put feature benefits the investor.
D) The call feature benefits the issuer; the put feature benefits the investor.
The call feature allows the issuer to call in old bonds at a high rate of interest and then issue new bonds at a lower rate, similar to refinancing a high interest rate loan. The put feature allows the investor to sell the bond back to the issuer at par when the bond market value has declined, thus avoiding a loss
Commercial paper issued by corporations can have maturities as short or as long as
A) 1 month or 6 months.
B) 1 month or 3 months.
C) 1 day or 270 days.
D) 30 days or 360 days.
C) 1 day or 270 days.
Commercial paper is issued by corporations to meet short-term cash needs. A form of money market instrument, it can have maturities as short as one day (literally overnight) or as long as 270 days (9 months).
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
A) Serial
B) Term
C) Balloon
D) Single maturity
B) Term
Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date.
Which of the following is true for U.S. Treasury-issued securities?
A) T-notes and T-bills pay interest annually.
B) T-notes are purchased at a discount to par, while T-bonds are purchased as a percentage of par.
C) T-bills and T-bonds pay interest semiannually.
D) T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par.
D) T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par.
T-bills are purchased at a discount, while T- bonds and T-note are purchased as a percentage of par. T-notes and T-bonds pay interest semiannually, but interest on T-bills is not paid until maturity (the difference between the discount paid and par value received).
When a corporation issues a mortgage bond, the issue’s total value
A) should be less than that of the real estate it is backed by.
B) should be greater than that of the real estate it is backed by.
C) is unrelated to the value of the real estate because it is an unsecured debt instrument.
D) must equal the value of the real estate by which it is backed
A) should be less than that of the real estate it is backed by.
Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn’t exceed the value of the property. Hence, the issue’s total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.
Treasury bond (T-bond) interest is stated as
A) a premium over the price paid.
B) a discount to the face value.
C) a percentage of the purchase price.
D) a percentage of par value.
D) a percentage of par value.
Like Treasury notes (T-notes), Treasury bonds (T-bonds) have interest stated as a percentage of par value. Example: Par value $1,000, with 4% interest equals $40 interest per year (0.04 × $1,000 = $40).
Which of the following earn interest but don’t pay interest?
A) T-bills
B) T-notes
C) T-bonds
D) None of these
A) T-bills
T-bills are sold at a discount and pay par at maturity. The difference between the discounted price and par is considered interest, but T-bills don’t make interest payments.
A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following except
A) promissory notes.
B) prime paper.
C) bonds.
D) commercial paper.
C) bonds.
To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.
Regarding filing for corporate bankruptcy, which of the following is true?
A) Reorganization can only occur after liquidation in a corporate bankruptcy filing.
B) Reorganization means that property will be taken and sold to repay all debts.
C) Liquidation means that property will be taken and sold to repay all debts.
D) Reorganization does not allow for continued operations to occur.
C) Liquidation means that property will be taken and sold to repay all debts.
The primary difference between a reorganization and a liquidation is that in a reorganization, the corporation can keep property and continue doing business. Liquidation means that all property will be taken and sold to repay all debts.
One of the major benefits of municipal bonds is
A) they are tax free at the federal level.
B) they are always state and local-tax free.
C) they pay a higher interest rate than similar corporate bonds.
D) they are safer than any other bonds.
A) they are tax free at the federal level.
Municipal bonds are federal-tax free and may be state- and local-tax free if the investor lives in that state. They pay a lower interest rate because of the tax-free status and are considered second in safety to U.S. government bonds.
The relationship between fixed-income prices and prevailing interest rates is
A) adverse.
B) coterminous.
C) reverse.
D) inverse.
D) inverse.
As interest rates (yields) increase, the price of outstanding debt decreases and vice versa. The resulting relationship is called an inverse relationship.
When the interest rates in the marketplace moves up or down, the price of all bonds move
A) inversely.
B) subversely.
C) conversely.
D) reversely.
A) inversely.
Interest rates and bond prices move in opposite directions. This is known as an inverse relationship.
