Chapter 2 Flashcards
(25 cards)
An investor has purchased 10 corporate bonds at a price of 135. At the end of the day, the bonds are quoted at 136.25. How much have the bonds risen in dollars?
a. $125
b. $12.50
c. $1.25
d. $.125
a. $125
One bond point is worth $10.00; 1.25 points, therefore, is worth: $12.50 X 10 bonds = $125
Which type of bonds require the investor to deposit coupons to receive their interest payments but have the owner’s name recorded on the books of the issuer?
a. Registered bonds
b. Bearer bonds
c. Book entry/journal entry bonds
d. Principal-only bonds
d. Principal-only bonds
Bonds registered as to principal only will still require the investor to clip coupons.
In response to a customer’s request for information on how inflation will affect their return realized from their semiannual coupon payments, you would look at the:
a. real interest rate
b. adjusted interest rate
c. interest conversion rate
d. current interest rate
a. real interest rate
The real interest rate will determine the return after inflation.
Which bonds are issues as a physical certificate without the owner’s name on them and require whoever possesses these bonds to clip the coupons to receive their interest payments and to surrender the bond at maturity in order to receive the principal payment?
a. Registered bonds
b. Book entry/journal entry bonds
c. Principal-only registered bonds
d. Bearer bonds
d. Bearer bonds
Bearer bonds are issued without a name on them, meaning that whoever has possession of the bond may clip the coupons and claim the interest.
All of the following are reasons a corporation would attach a warrant to their bond, except to:
a. save money
b. make the bond more attractive
c. increase the number of shares outstanding when the warrants are exercised.
d. lower the coupon
c. increase the number of shares outstanding when the warrants are exercised.
All of the choices listed are reasons a corporation would attach warrants to their bonds, except to increase the number of shares outstanding.
The type of bond that is secured by real estate is called:
a. Real estate trust certificates
b. Mortgage bond
c. Equipment trust certificates
d. Collateral trust certificates
b. Mortgage bond
A mortgage bond is secured by real estate
Collateral trust certificates use which of the following as collateral?
a. Real estate
b. Mortgage
c. Stocks and bonds issued by the same company
d. Stocks and bonds issued by another company
d. Stocks and bonds issued by another company
Collateral trust certificates have pledged securities, which they own, issued by another company as collateral for the issue.
An investor holding an 8% subordinated debenture will receive how much at maturity?
a. $1,000
b. $1,080
c. $1.040
d. Depends on the purchase price
c. $1.040
An investor who has purchased an 8% corporate bond will receive the principal payment plus the last semiannual interest payment at maturity for a total of $1,040.
An ABC corporate bond is quoted at 110 and is convertible into ABC common at 20 per share parity. Price for the stock is:
a. 21
b. 22
c. 23
d. 24
b. 22
The parity price of the stock is found by using the following formulas:
No. of shares = PAR/CVP, 1,000/20=50,
parity price = CMV of bond/ No. of shares = 1,100/50=22
An investor buys $10,000 of the 10% corporate bonds with 5 years left to maturity. the investor pays 120 for the bonds. what is the investor’s current yield?
a. 5.45%
b. 8.33%
c. 6%
d. 9.2%
b. 8.33%
The current yield is found by dividing the annual income by the purchase price. In this case $100/$1,200 equals 8.33%
XYZ has 8% subordinated debentures trading in the market place at $120. They are convertible into XYZ common stock at $25 per share. What is the parity price of the common stock?
a. 29
b. 31
c. 30
d. 28
c. 30
The parity price is found by determining the number of shares that can be received upon conversion par/conversion price = 1,000/25= 40 shares, then the parity price equals the current market value of the convertible/ No. of shares, 1,200/40=$30
Which one of the following debt securities pays interest?
a. Commercial paper
b. T-bill
c. Industrial revenue bond
d. Banker’s acceptance
c. Industrial revenue bond
Of all the choices listed, only an industrial revenue bond pays interest; all of the other choices are issued at a discount.
An investor would expect to realize the largest capital gain by buying bonds that are:
a. long term when rates are high.
b. short term when rates are low.
c. short term when rates are high.
d. long term when rates are low.
a. long term when rates are high.
An investor would expect to realize the largest gain by purchasing bonds when rates are high. the bond with the longest time left to maturity will become worth the most as interest rates fall.
All of the following trade with accrued interest except:
A. Treasury bonds
B. Negotiable CDs
C. Income bonds
D. Revenue bonds
C. Income bonds
Income bonds do not trade with accrued interest. The issuer of an income bond will only pay interest if there is enough income to do so. Income bonds trade “flat” without accrued interest.
ABC has issued 7% subordinated debentures, which are convertible into common shares at $ 12.50 per share. Which of the following are true?
I. The bonds are backed by common stock
Il. The bonds are backed by the full faith of ABC
Ill. The holder of the bond is an owner of ABC since the bonds are convertible
IV. The holder of the bonds is a creditor of the company and has a senior position relative to common stockholders.
A. Il and IV
B. I and II
C. Il and III
D. IV only
A. Il and IV
The bonds are debentures and are backed by the full faith and credit of the issuer. Since the holder of the bond is a creditor of the company, they have a senior position if the company is forced to liquidate.
An investor has purchased 10M of XYZ 9’s due March 1, 2040 at
110. If the bonds closed that day at 109.25 What is the investor’s gain or loss?
A. $ 750 gain
B. $ 75 gain
C. $ 75 loss
D. $ 750 loss
C. $ 75 loss
10m = $ 10,000 in principal. The bonds closed down three
quarters of of a point or $7.50 per bond The investors owns 10
bonds, $ 7.50 x 10 bonds = $ 75.
List the following bonds in order from the most risky to the least risky:
I. US Treasury Bond
I. Municipal Bond
Ill. Subordinated Debenture
IV. Income Bond
A. III, IV, II, I
B. I, II, III, IV
C. II, III, I, IV
D. IV, III, II, I
D. IV, III, II, I
Remember that an income bond is also known as an adjustment bond. Companies who are trying to avoid bankruptcy usually issue adjustment bonds to try to stay out of bankruptcy. Treasury bonds are the safest bonds listed.
The price of bonds in the secondary market depends on all of the following except:
A. Supply & demand
B. Interest rates
C. Issuer
D. The Trustee
D. The Trustee
All of the factors listed will have a significant impact on the price of bonds in the secondary market except who the trustee is. It is highly unlikely that the trustee would have any impact at all on the price of a bond.
Unsecured bonds are all of the following except:
A. Have lower interest rates than bonds with subordinate status
B. Known as debentures
C. In the event of default, the bondholders are paid first, before general creditors
D. Are backed only by good faith and credit of the issuer
C. In the event of default, the bondholders are paid first, before general creditors
In the event of default, unsecured bonds are paid at the same rate and time as general creditors. Unsecured debentures will have a lower interest rate than subordinated debentures. All
debentures are backed only by the good faith and promise to pay of the issuer.
Which bonds are fully registered and recorded without any physical certificate; the issuer knows who gets the interest and no coupons are necessary?
A. Bearer bonds
B. Registered bonds
C. Principal-only registered bonds
D. Book entry/journal entry bonds
D. Book entry/journal entry bonds
Book entry or journal entry bonds are fully registered and recorded in a book or journal with no physical certificate being issued.
Bonds that pay no semi-annual interest are what type of bonds ?
A. Subordinated debentures
B. Convertible bonds
C. Income/Adjustment bonds
D. Zero coupon bonds
D. Zero coupon bonds
Zero coupon bonds pay no semi-annual interest; they are issued at a deep discount and are expected to appreciate up to their par value by maturity.
A bond’s yield to maturity is all of the following except:
A. The most important yield for the investor
B. The investor’s total annualized return
C. The lowest return if the bond is a premium bond
D. The lowest return if the bond is a discount bond
D. The lowest return if the bond is a discount bond
If the bond is bought at a discounted price, the bond’s yield to maturity will be the highest yield. The bondholder will get the full par value at maturity.
A corporate bond purchased at 150 with an annual interest rate of 8% has what current yield?
A. 5.33%
B. 12%
C. 7.5%
D. $120
A. 5.33%
Current yield is always a relationship between income and price. Current
yield = annual income / current market price. Annual income ($80) divided
by the current market price ($1500) = 5.33%.
Airlines, railroads and large shipping firms will sell what types of bonds?
A. Real estate trust certificates
B. Mortgage bonds
C. Equipment trust certificates
D. Collateral trust certificates
C. Equipment trust certificates
These large companies will often sell equipment trust certificates in order to purchase new equipment for the businesses. The bonds will be backed by the planes, railroad cars or ships.
