Question: A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
Answer Options:
a. True
b. False
Answer: b. False
Question: Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond’s face value.
Answer Options:
a. True
b. False
Answer: a. True
Question: A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.
Answer Options:
a. True
b. False
Answer: a. True
Question: The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
Answer Options:
a. True
b. False
Answer: a. True
Question: The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
Answer Options:
a. True
b. False
Answer: a. True
Question: The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
Answer Options:
a. True
b. False
Answer: a. True
Question: A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)
Answer Options:
a. True
b. False
Answer: b. False
Question: Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.
Answer Options:
a. True
b. False
Answer: b. False
Question: As a general rule, a company’s debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
Answer Options:
a. True
b. False
Answer: a. True
Question: Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.
Answer Options:
a. True
b. False
Answer: a. True
Question: There is an inverse relationship between bonds’ quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
Answer Options:
a. True
b. False
Answer: a. True
Question: Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor’s perspective than regular bonds.
Answer Options:
a. True
b. False
Answer: b. False