Question 1

You are a taxpayer in the 24 percent tax bracket and you own a tax-exempt bond that pays 6 percent.What is your taxable equivalent yield?

Accepted Answer

The taxable equivalent yield is calculated as the tax-exempt yield divided by (1 - tax rate). So, for a 6 percent tax-exempt yield and a 24 percent tax bracket, the calculation is 6% / (1 - 0.24) = 7.89 percent.

Question 2

Which one of the following statements is true?

Accepted Answer

Bond quotations typically list prices as a percentage of the bond's face value, which is a standard practice in the financial industry. This allows investors to easily compare the value of bonds with different face values.

Question 3

If a bond is quoted in the newspaper at 96,the current price of a $1,000 face value bond is:

Accepted Answer

When a bond is quoted at 96, it means it is trading at 96% of its face value. Therefore, for a $1,000 face value bond, the current price would be 96% of $1,000, which is $960.00.

Question 4

A bond backed by the full faith,credit,and unlimited taxing power of the state or local government that issued it is called a ________ bond.

Accepted Answer

General obligation bonds are backed by the full faith, credit, and taxing power of the issuing government entity, rather than revenues from a specific project.

Question 5

Which of the following can be purchased through Treasury Direct at www.treasurydirect.gov?

Accepted Answer

All of the options listed (TIPS, Treasury bills, Treasury notes, and Treasury bonds) can be purchased through Treasury Direct, which is an online platform provided by the U.S. Department of the Treasury for buying and managing government securities directly from the U.S. government.

Question 6

If a bond is quoted in the newspaper at 103,the current price of a $1,000 face value bond is:

Accepted Answer

When a bond is quoted at 103, it means it is trading at 103% of its face value. Therefore, a $1,000 face value bond would be priced at $1,030.00 (1,000 x 1.03).

Question 7

If comparable bonds are paying 8 percent and the approximate market value of a $1,000 bond is $1,375,then what is the semiannual interest on the bond?

Accepted Answer

The semiannual interest on the bond can be calculated by first determining the annual interest rate that the bond is effectively paying, given its market value. If comparable bonds are paying 8 percent annually, this means the bond in question would also aim to yield a similar return. However, because the bond's market value is $1,375 instead of its face value of $1,000, the actual yield is higher. The annual interest in dollars would be 8% of $1,000, which is $80. Since interest payments on bonds are typically made semiannually, we divide this amount by 2 to get the semiannual interest payment, which is $40. However, the information provided and the calculation do not align with the options given, indicating a misunderstanding in the calculation based on the provided options. The correct approach to find the semiannual interest based on the options given would involve understanding the bond's coupon rate or yield based on its market value, but with the information provided and typical calculations, none of the options directly align with the standard calculation of semiannual interest from an 8% annual yield on a $1,000 bond. Given the options and the typical approach to calculating semiannual interest, there seems to be a discrepancy in the explanation or a misunderstanding in the calculation process based on the provided options.

Question 8

The highest bond rating issued by Moody's is:

Accepted Answer

The highest bond rating issued by Moody's is Aaa, which indicates the highest level of creditworthiness and the lowest risk of default.

Question 9

Which one of the following statements is false regarding corporate bonds?

Accepted Answer

It is false that you cannot trade bonds online. In fact, many platforms and brokerage services allow for the online trading of bonds, similar to stocks and other securities.

Question 10

The commissions for purchasing bonds:

Accepted Answer

Bond commissions can include a stated dollar amount plus an additional commission, which may vary based on the bond type and the broker's policies.

Question 11

If comparable bonds are paying 6 percent and the approximate market price of a $1,000 bond is $850,then what is the annual interest on the bond?

Accepted Answer

The annual interest on the bond can be found by calculating the yield, which is the interest payment divided by the market price of the bond. Since comparable bonds are paying 6 percent, the bond in question should also yield approximately 6 percent on its market price. Therefore, the annual interest is 6% of $850, which is $51.

Question 12

The minimum price that a seller is willing to receive for a government security is known as the ________ price.

Accepted Answer

The minimum price that a seller is willing to receive for a government security is known as the "ask" price. This is the price at which the seller is asking to sell the security.

Question 13

Dave Johnson's objective was to purchase a government bond that provided some protection against inflation as measured by the consumer price index.To fulfill this objective,John purchased a:

Accepted Answer

TIPS, or Treasury Inflation-Protected Securities, are designed specifically to provide protection against inflation. They are indexed to the Consumer Price Index (CPI), ensuring that the principal value of the bond increases with inflation, thereby offering an inflation hedge.

Question 14

Which one of the following statements is false?

Accepted Answer

Most individual investors purchase Treasury securities through a non-competitive bidding process, meaning they agree to accept whatever yield is determined at auction, rather than bidding competitively for a specific yield. Competitive bidding is more common among institutional investors.

Question 15

June Tavia is trying to calculate the taxable equivalent yield for a municipal bond.If the bond she owns pays 5 percent interest and she is in the 22 percent tax bracket,what is the taxable-equivalent yield (round to nearest percent)?

Accepted Answer

The taxable equivalent yield is calculated as the tax-free yield divided by (1 - tax rate). So, for a 5% interest rate and a 22% tax bracket, the calculation is 5% / (1 - 0.22) = 5% / 0.78 = 6.41%, which rounds to 6 percent.

Question 16

A bond that is repaid from the income generated by the project it is designed to finance is called a:

Accepted Answer

Revenue bonds are specifically designed to be repaid from the income generated by the project or specific revenue sources they finance, such as toll roads, bridges, or municipal utilities.

Question 17

A government security issued in minimum units of $100 with a 30-year maturity is called a:

Accepted Answer

Treasury bonds are long-term government securities issued with a maturity of 30 years and are sold in minimum units of $100.

Question 18

The highest bond rating issued by Standard & Poor's is:

Accepted Answer

AAA is the highest bond rating issued by Standard & Poor's, indicating the highest level of creditworthiness.

Question 19

Which of the following sources can be used by an investor to obtain a corporation's annual report?

Accepted Answer

All of the options listed (A through D) are viable ways an investor can obtain a corporation's annual report. Professional advisory services often have access to or can easily obtain such reports for their clients. Corporations typically make their annual reports available on their websites for public access. Investors can also request a copy of the annual report by calling the corporation directly or by sending a written request through mail.

Question 20

A government security issued in minimum units of $100 with maturities that are one year or less is called a:

Accepted Answer

Treasury bills (T-bills) are short-term government securities issued at a discount from their face value and mature in one year or less, making them the correct answer.

Quiz 15: Investing in Bonds