chapter-07-interest-rates-and-bond-valuation-8

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61. A zero coupon bond:
A. is sold at a large premium.
B. pays interest that is tax deductible to the issuer when paid.
C. can only be issued by the U.S. Treasury.
D. has more interest rate risk than a comparable coupon bond.
E. provides no taxable income to the bondholder until the bond matures.

62. Which one of the following risks would a
floating-rate bond tend to have less of as compared to a fixed-rate coupon
bond?
A. real rate risk
B. interest rate risk
C. default risk
D. liquidity risk
E. taxability risk

63. The collar of a floating-rate bond refers to the
minimum and maximum:
A. call periods.
B. maturity dates.
C. market prices.
D. coupon rates.
E. yields to maturity.

64. Last year, you purchased a “TIPS” at
par. Since that time, both market interest rates and the inflation rate have
increased by 0.25 percent. Your bond has most likely done which one of the
following since last year?
A. decreased in value due to the change in inflation rates
B. experienced an increase in its bond rating
C. maintained a fixed real rate of return
D. increased in value in response to the change in market rates
E. increased in value due to a decrease in time to maturity

65. Recently, you discovered a putable income bond
that is convertible. If you purchase this bond, you will have the right to do
which of the following?
I. force the issuer to repurchase the bond prior to maturity
II. choose when you wish to receive interest payments
III. convert the bond into a TIPS
IV. convert the bond into equity shares
A. I and III only
B. I and IV only
C. II and III only
D. III and IV only
E. I, II, and IV only

66. “Cat” bonds are primarily designed to
help:
A. municipalities survive economic recessions.
B. corporations respond to overseas competition.
C. the federal government cope with huge deficits.
D. corporations recover from involuntary reorganizations.
E. insurance companies fund excessive claims.

67. Mary is a retired widow who is financially
dependent upon the interest income produced by her bond portfolio. Which one of
the following bonds is the least suitable for her to own?
A. 6-year, putable, high coupon bond
B. 5-year TIPS
C. 10-year AAA coupon bond
D. 5-year floating rate bond
E. 7- year income bond

68. Al is retired and enjoys his daily life. His one
concern is that his bonds provide a steady stream of income that will continue
to allow him to have the money he desires to continue his active lifestyle
without lowering his present standard of living. Although he has sufficient
principal to live on, he only wants to spend the interest income provided by
his holdings and thus is concerned about the purchasing power of that income.
Which one of the following bonds should best ease Al’s concerns?
A. 6-year, putable, high coupon bond
B. 5-year TIPS
C. 10-year AAA coupon bond
D. 5-year municipal bond
E. 7- year income bond

69. Phil has researched TLM Technologies and believes
the firm is poised to vastly increase in value. He wants to invest in this
company. Phil has decided to purchase TLM Technologies bonds so that he can
have a steady stream of interest income. However, he still wishes that he could
share in the firm’s success along with TLM’s shareholders. Which one of the
following bond features will help Phil fulfill his wish?
A. put provision
B. positive covenant
C. warrant
D. crossover rating
E. call provision

70. A U.S. Treasury bond that is quoted at 100:11 is
selling:
A. for 11 percent more than par value.
B. at an 11 percent discount.
C. for 100.11 percent of face value.
D. at par and pays an 11 percent coupon.
E. for 100 and 11/32nds percent of face value.

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