Question 1

When you refer to a bond's coupon,you are referring to which one of the following?

Accepted Answer

A bond's coupon refers to the annual interest payment that the bond issuer pays to the bondholder. This interest payment is typically expressed as a percentage of the bond's face value and is paid out to the bondholder on a regular basis (usually semi-annually or annually). The coupon rate is typically fixed at the time the bond is issued and remains constant throughout the life of the bond.

Question 2

The current yield on a bond is equal to the annual interest divided by which one of the following?

Accepted Answer

The current yield on a bond is equal to the annual interest divided by the current market price of the bond. Current yield is a measure of the return on investment in the bond at its current price. Therefore, the correct choice is D) Current market price.

Question 3

Miller Farm Products is issuing a 15-year,unsecured bond.Based on this information,you know that this debt can be described as a:

Accepted Answer

A debenture is an unsecured bond, which means that it is not backed by any specific collateral in the event of default. This is the only option given that describes an unsecured bond.

Question 4

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

Accepted Answer

A zero coupon bond is a type of bond that is initially sold at a deep discount to its face value (or par value) and does not make any interest payments. Instead, the bondholder receives the full face value of the bond at maturity, which represents the return on the investment. This type of bond is also known as a "discount bond".

Question 5

A registered form bond is defined as a bond that:

Accepted Answer

A registered form bond pays coupon payments directly to the owner of record and is not a bearer bond, held in street name or listed with the SEC. It is not necessarily unsecured as it could be either secured or unsecured.

Question 6

Manning,Inc.originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.Which one of the following terms applies to this situation?

Accepted Answer

The term "fallen angel" applies to bonds that were originally rated investment grade but have been downgraded to speculative or junk status. This term is often used by investors to describe bonds that were once considered safe investments but have now become riskier.

Question 7

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Accepted Answer

A sinking fund is a type of account that a bond trustee manages for the sole purpose of redeeming bonds early. The issuer of the bonds makes periodic payments into the sinking fund, and the trustee uses the funds to purchase some of the outstanding bonds in the market. This reduces the size of the outstanding debt and lowers the interest expense for the issuer.

Question 8

The call premium is the amount by which the:

Accepted Answer

The answer of The call premium is the amount by...

Question 9

On which one of the following dates is the principal amount of a bond repaid?

Accepted Answer

The principal amount of a bond is repaid on the maturity date, which is the date when the bond reaches the end of its term and is due to be paid back in full. The coupon date is when the bond's interest payments are made, the issue date is when the bond is first issued, the discount date is when the bond is sold at a discount, and the face date is not a commonly used term in bond finance.

Question 10

This morning,Jeff found a bond certificate lying on the floor of a bank.He picked it up and noticed that the bond matured today.He presented the bond to the bank teller and received both the principal and interest payment.The bond that Jeff found must have been which one of the following?

Accepted Answer

A bearer form bond is a type of bond that is not registered to a particular owner and is payable to whoever holds it. Since Jeff found the bond certificate lying on the bank floor, it is likely that it was a bearer form bond. Additionally, since the bond matured on the day Jeff found it, he was able to receive both the principal and interest payment by presenting the bond to the bank teller.

Question 11

A protective covenant:

Accepted Answer

A protective covenant is a provision in a bond agreement that limits the actions of the borrower to protect the interests of bondholders. It typically outlines certain requirements or restrictions on the borrower, such as maintaining a minimum level of financial performance, limiting additional debt issuance, or preserving collateral. This helps ensure that the borrower does not engage in activities that could jeopardize the ability to repay the bond, and protects the bondholders from potential losses.

Question 12

Travis recently purchased a callable bond.However,that bond cannot be currently redeemed by the issuer.Thus,the bond must currently be:

Accepted Answer

A callable bond is a bond that can be redeemed by the issuer before its maturity date. However, if the bond cannot currently be called by the issuer, it is call protected, meaning the bondholder has protection from early redemption. Therefore, the correct answer is D.

Question 13

A note is a(n):

Accepted Answer

A note is an unsecured debt that is generally payable within the next 10 years. It is a written agreement between a borrower and a lender that includes the terms and conditions of the loan, such as the interest rate, repayment schedule, and any fees or penalties.

Question 14

The annual interest divided by the face value of a bond is referred to as the:

Accepted Answer

The coupon rate refers to the annual interest payment on a bond divided by its face value. This is also known as the nominal rate.

Question 15

The price at which a dealer will purchase a bond is called the _____ price.

Accepted Answer

The price at which a dealer is willing to buy a bond is called the bid price. This is the price at which an investor can sell the bond to the dealer. The asked price, on the other hand, is the price at which the dealer is willing to sell the bond to an investor. The face value of a bond is the value of the bond at maturity, while a call option gives the issuer the right to buy back a bond at a specified price, and a put option gives the investor the right to sell the bond back to the issuer at a specified price.

Question 16

Dexter,Inc.has a bond issue outstanding.The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years.This provision is referred to as the _____ provision.

Accepted Answer

The provision that prohibits the issuer from redeeming the bonds during the first few years is known as the deferred call provision. This clause is designed to protect bondholders from early redemption, which can be disadvantageous to them if interest rates have fallen since the bonds were issued. The other options, such as safeguard, market, liquidity, and sinking fund, do not pertain to this specific provision.

Question 17

The written agreement that contains the specific details related to a bond issue is called the bond:

Accepted Answer

The term indenture is commonly used in finance to refer to a written agreement between a bond issuer and a bondholder that specifies the key terms and conditions of a bond issue. The indenture will typically include important details such as the bond's interest rate, maturity date, call provisions, and covenants.

Question 18

Which one of the following terms refers to a bond's rate of return that is required by the marketplace?

Accepted Answer

Yield to maturity is the rate of return that an investor can expect to receive if the bond is purchased at its current market price and held until maturity. It is based on the bond's coupon rate, face value, and current market price, and represents the return required by the marketplace. The coupon rate refers to the interest rate paid on the bond, while dirty yield and call yield are not commonly used terms in finance. The discount rate is a broader term that can refer to the interest rate used to calculate the present value of future cash flows in a variety of financial contexts.

Question 19

What is the principal amount of a bond that is repaid at the end of the loan term called?

Accepted Answer

The principal amount of a bond that is repaid at the end of the loan term is called the face value. Therefore, the correct answer is E. Choices A, B, C, and D are all related to the price of the bond, but they do not refer specifically to the principal amount.

Question 20

A call provision grants the bond issuer the:

Accepted Answer

A call provision grants the bond issuer the option of repurchasing the bonds prior to maturity at a prespecified price. This is also known as a callable bond. The issuer has the right, but not the obligation, to call or redeem the bond before the maturity date. The prespecified price is usually set at a premium to the bond's face value. This gives the issuer the flexibility to retire the bonds if interest rates fall or if the issuer's creditworthiness improves, which can save money on interest payments. However, it can also be disadvantageous for investors, especially if they are forced to reinvest their funds at a lower interest rate.

Quiz 6: Interest Rates and Bond Valuation