1. Which of the following correctly describes the effect of a decline in interest rates on bond prices?
A. The prices of existing bonds rise.;
B. The prices of existing bonds are not affected.;
C. The prices of the existing bonds fall.;
D. The prices of newly issued bonds are lowered.
2. The major source of risk based by investors who purchase bonds is
A. purchasing power risk.;
B. liquidity risk.;
C. event risk.
D. interest rate risk.;
3. A $1000 par value bond that was issued two years ago by the Golden Ibis Corporation has a 6% coupon. If the prevailing market rate for interest on comparable bonds is now 7%, then the Golden Ibis bond pays it bondholders an annual interest income of
A. $70, and the bond would sell for less than its par value.;
B. $60, and the bond would sell for more than its par value.;
C. $70, and the bond would sell for more than its par value.
D. $60, and the bond would sell for less than its par value.;
4. A bond which has a deferred call
A. would not have to be redeemed when it reaches maturity.;
B. could be retired at any time prior to maturity.;
C. could not be retired for a specified period after the date of issue, but after that could be retired at any time.;
D. could be retired at any time during the initial call period, but after that period (usually the first five years after issue).
5. Some securities are called junk bonds because
A. they have a high risk of default and the debt is unsecured.
B. they have secured by equipment-type collateral rather than by cash.;
C. they are issued by foreign companies.
D. the companies that issue them have inadequate amounts of debt in their corporate structures.;
6. The specific type of risk that is measured by bond ratings is
A. interest rate risk.;
B. market risk.;
C. purchasing power risk.
D. default risk.;
7. The most common yield curve is upward sloping, which means that
A. the nearer the call date, the more volatile the bond price will be.;
B. yields tend to increase with longer maturities.
C. yield spreads tend to increase over time.
D. default risk increases with maturity.
8. According to the expectation hypothesis, investors’ expectations of increasing inflation will result in
A. an upward-sloping yield curve.;
B. a flat yield curve.;
C. a downward-sloping yield curve.;
D. a humped yield curve.
9. At any given time, the yield curve is affected by all of the following EXCEPT
A. inflationary expectations.;
B. the approximate yield formula.;
C. short- and long-term supply and demand conditions.
D. liquidity preferences.;
10. Using the present-value method, all of the following are needed to value a bond EXCEPT
A. the issue’s bond rating.
B. the par value.;
C. the number of years until maturity.;
D. the annual coupon payment.;
11. What is the current yield of a $10,000 bond bearing a 14% coupon rate and having a current market price of 95?
D. insufficient information is provided.
12. The rate of return which indicates the return an investor can expect to earn by holding a bond over a period of time that is less than the life of the issue is known as
A. bond equivalent yield (BEY)
B. expected return;
D. promised yield;
13. The main purpose of a bond ladder is to
A. achieve the highest level of capital gains possible.;
B. maintain a highly liquid portfolio.;
C. less the impact of swings in interest rates.;
D. offset the effects of bond duration.
14. A corporation that wants to raise funds but that does not want to issue debt or dilute its EPS will most likely
A. issue preferred stock.;
B. execute a stock split.;
C. issue convertible debentures.;
D. execute a reverse stock split.
15. Preferred stock investors are primarily subject to two types of risk. These two primary types of risk are
A. interest rate and business risk.;
B. event risk and liquidity.;
C. purchasing power risk and liquidity risk.;
D. financial risk and event risk.
16. When issuing preferred stock, the issuing company typically agrees that it will pay preferred stockholders
A. a dividend that is a certain percentage higher than the dividend payable to common stockholders.;
B. the dividend payable to common stockholders, plus a special conversion bonus.
C. a fixed level of semi-annual dividends, and that such payment are to be paid only if dividends are also paid to common stockholders.
D. a fixed level of quarterly dividends, and that such payments will take priority over common stock dividends.
17. A share of preferred with a $100 par value, which pays a 12% dividend, should have a current price of _____ when the dividend yield is 10%?
18. Convertible bonds can generally be converted into
A. share of the issuing company’s common stock.;
B. parcels of mortgage pass-through certificates.
C. additional shares of debenture bonds.
D. shares of the issuing company’s preferred stock.;
19. A convertible bond has a par value of $1000 and a conversion price of $74. How many shares can the bondholder receive in exchange for the bond?
A. 11.2 shares;
B. 9.8 shares;
C. 13.5 shares.
D. 7.4 shares;
20. Which of the following statements about conversion premiums is (are) correct?1. Conversion premiums often amount to as much as 25 to 30% or more of an issue’s true conversion value.2. Conversion premiums tend to fade away as the price of the convertible goes up.
A. 1 only;
B. 2 only;
C. Both 1 and 2;
D. Neither 1 or 2.