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ACCTG 509

Chapter 6

True/False Questions

1)Treasury notes have original maturities from 1 to 10 years and Treasury bonds have original maturities of 10 years or more.

2. A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.

3. Of the three major sectors of bond issuers, corporations have the greatest dollar value of bonds

outstanding.

4. “On the run” Treasury notes and bonds are newly issued securities and “off the run” Treasuries are securities that have been previously issued.

5. Bonds that give the bondholder the opportunity to purchase common stock at a prespecified price up to a specified date are called convertible bonds.

6. The dirty price plus accrued interest is called the clean price of the security.   

7. Accrued interest owed to the bond seller increases as the next coupon payment date approaches  

8. Revenue bonds are backed by the full revenue of the municipality.  

9. Tax exempt bonds pay lower interest rates than taxable bonds because of their tax advantage.  

10. An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture.

11. Municipalities are liable for repayment of industrial development bonds in the event the corporation cannot repay.

12. Bond ratings use a classification system to give investors an idea of the amount of default risk associated with the bond issue.

13. Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.   

14. Euro bonds are bonds denominated in the issuer's home currency, but are issued outside their home country.

15. Dollar denominated bonds issued in the U.K. are called Bulldog bonds.  

Multiple Choice Questions

16. The largest component of the U.S. National Debt is
    1. T-Bills
    2. T-Bonds
    3. State and local government securities

1. 4. U.S. Savings Bonds
   5. None of the above

17. A T-Bond with a $1000 par is quoted at 98:20 Bid, 98:24 Ask. The clean price for you to buy this bond is

A) $986.25

B) $987.50

C) $982.00

D) $982.40

E) None of the above

18. The quoted ask yield on a 15 year $1000 par T-Bond with a 6% semiannual payment coupon and a price quote of 104:12 is

A) 6.00%

B) 5.60%

C) 5.57%

D) 2.81%

E) 2.78%

19. A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a

1. 1. STRIP
   2. T-Note

1. 3. T-Bond
   4. G.O. Bond

1. 5. Revenue Bond

20. An 18 year T-Bond can be stripped into how many separate securities?

A) 18                                       B) 19                                       C) 36                                       D) 37                                       E) 38

21. A life insurer owes $50,000 in 5 years. To fund this outflow the insurer wishes to buy strips that mature in 5 years. The strips have a $2,000 face value per strip and pay a 7% EAR. How much must the insurer spend now to fully fund the outflow?

A) $10,000

B) $25,000

C) $42,675

D) $35,649

E) $39,877

22. The January 1, 2002 ask yield on a Treasury strip maturing in 6 years is 4.99%. If the face value is

$1000,what should be the quoted cost of the strip today (use annual compounding)?

A) 70:00

B) 74:20

C) 74:63

D) 74:16

E) 74:12

23. Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?
    1. AAA rated noncallable corporate bond with a sinking fund.
    2. AA rated callable corporate bond with a sinking fund
    3. AAA rated callable corporate bond with a sinking fund
    4. High quality municipal bond
    5. AA rated callable corporate bond without a sinking fund  

24. On June 1, 2000 you purchase a $10,000 par T-Note that matures in 5 years. The coupon rate is 6% and the price quote is 98:6. The last coupon payment was May 1, 2000 and the next is November 1, 2000

(184 days total). The accrued interest is

A) $75.35

B) $101.00

C) $50.54

D) $40.65

E) $35.67

25. On September 1, 2000 an investor purchases a $10,000 par T-Bond that matures in 15.67 years. The coupon rate is 6% and the investor buys the bond 60 days after the last coupon payment (120 days before the next). The ask yield is 7%. The dirty price of the bond is:

A) $9,045.63

B) $9,157.47

C) $9,145.63

D) $9,200.02

E) $9,000.10

26. Interest income from Treasury securities is                    , and interest income from municipal bonds is always

             .

1. 1. Exempt from federal taxes; exempt from all taxes
   2. Taxable at the state level only; exempt from state taxes only
   3. Taxable at federal level only; exempt from federal taxes
   4. Taxable at the state level; taxed at the federal level
   5. Totally tax exempt; exempt from state taxes  

27. An investor is in the 28% federal tax bracket, pays an 8% state tax rate and 2% in local income taxes. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying interest

A) 15.79%

B) 8.33%

C) 9.38%

D) 9.68%

E) 8.47%

28. An investor is trying to decide between a muni paying 6% or an equivalent taxable corporate paying 7.5%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond?

A) 80.00%

B) 20.00%

C) 25.00%

D) 66.67%

E) 33.33%

29. Standard revenue bonds are
    1. Backed by the full taxing authority of the municipality
    2. Collateralized by the earnings from a specific project

1. 3. Bonds backed by mortgages
   4. Backed by the U.S. Treasury
   5. Always offered with a best efforts offering

30. When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a

1. 1. Rights offering
   2. Private placement

1. 3. Firm commitment
   4. Best efforts

1. 5. Standby offering

31. The entire contract between the bondholders and bond issuer is called the                    .

1. 1. Covenant
   2. Debenture

1. 3. Indenture
   4. Denture

1. 5. Monitor

32. Which of the following is/are true about callable bonds?

1. Must always be called at par
2. Will normally be called after interest rates drop
3. Can be called by either the bondholder or the bond issuer
4. Have higher required returns than non-callable bonds

1. I and II only
2. II and IV only
3. III and IV only

4. I, II and III only
5. I, II, III and IV are true

33. Bonds collateralized with tangible, non-real estate property are called

1. 1. Debentures
   2. Indentures
   3. Subordinated debentures

1. 4. Mortgage bonds
   5. None of the above

34. Convertible bonds are
    1. Bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond
    2. Bonds in which the issue matures (converts) a little each year
    3. Bonds collateralized with certain types of automobiles
    4. Bonds that allow the issuing company to require bondholders to purchase stock in exchange for the bond
    5. None of the above

35. A holder of Rainbow Funds convertible bonds with a $1,000 price can convert the bond to 20 shares of common stock. The stock is currently priced at $44/share. By what percent does the stock price have to rise to make conversion potentially attractive?

A) 10.00%

B) 14.73%

C) 11.11%

D) 13.64%

E) 10.69%

36. With respect to private placements of bonds, which of the following is correct?

1. Issuers of privately placed bonds tend to be less well known than public bond issues
2. Interest rates on privately placed debt tend to be higher than for similar public issues
3. Purchasers of privately placed debt have assets of at least $100 million
4. Once bonds have been privately placed, the original buyers must hold the bonds until maturity

1. I only
2. I and III only

3. I, II and III only
4. I, III and IV only

5. I, II, III and IV

37. Which of the following statements about Euro bonds is/are true?

1. The issuer chooses the currency of denomination
2. Spreads on firm commitment offers are lower for Euro bonds than for U.S. bonds
3. Euro bonds typically have denomination of $5,000 and $10,000
4. Euro bonds are bearer bonds

1. I and II only
2. I, III and IV only

3. II, III and IV only
4. II and III only

5. I, II, III and IV are true

38. Brady bonds are sometimes converted to                   when the issuer's credit rating improves.

1. 1. Samurai bonds
   2. Zombie bonds

1. 3. Bulldog bonds
   4. Sovereign bonds

1. 5. Phoenix bonds