Finance 002-Investments-Quiz 5 (Chapter 14 and 15)

If bond prices rise, the yield to maturity declines.

 True
 False 

The prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds.

 True
 False 

The spread (the basis points) between the yields on AAA-rated bonds and B-rated bonds tends to rise when yields increase.

 True
 False 

If a bond is selling for a premium,

	A.	the bond cannot be called
	B.	the yield to maturity exceeds the current yield
	C.	the current yield exceeds the yield to maturity
	D.	the current yield has risen

If interest rates increase, a bond may be called.

 True
 False 

If a $1,000 bond with a 7 percent coupon were to sell for $978, the current interest rate exceeds 7 percent.

 True
 False 

The market price of preferred stock moves directly with changes in interest rates.

 True
 False 

If investors expect interest rates to decline, they should buy bonds.

 True
 False 

Fluctuations in yields is one means by which the economy allocates scarce credit.

 True
 False 

The concept of duration stresses when a bond will make its payments to bondholders.

 True
 False 

Sources of risk to investors in municipal bonds include
1. fluctuations in interest rates
2. reinvestment rate risk
3. default risk

	A.	2 and 3
	B.	1 and 3
	C.	1 and 2
	D.	all of the above

If an individual is in the 35 percent income tax bracket and corporate debt yields 7.5 percent, then to be competitive municipal debt must yield at least

	A.	4.88%
	B.	11.54%
	C.	7.59%
	D.	2.63%

The owner of a Ginnie Mae bond receives monthly both interest and principal repayments.

 True
 False 

General obligation bonds

	A.	not illustrative of a tax-exempt bond
	B.	are secured by property
	C.	are supported by taxing authority
	D.	illustrative of a revenue bond

If interest rates decline, the expected life of a Ginnie Mae bond is reduced.

 True
 False 

Sources of risk to investors who purchase federal government bonds include
1. reinvestment rate risk
2. risk of inflation
3. interest rate risk

	A.	all of the above
	B.	2 and 3
	C.	1 and 2
	D.	1 and 3

Treasury bills are sold for a premium.

 True
 False 

Treasury bonds may be bought and sold in the secondary markets like corporate bonds.

 True
 False 

The price of a municipal bond will tend to rise when interest rates decline.

 True
 False 

A revenue bond is supported by the taxation authority of the issuing government.

 True
 False 

Most bonds pay interest semi-annually.

 True
 False 

The smaller the duration, the more volatile the bond's price.

 True
 False 

The value of a bond depends on the amount of principal, when it matures, and the interest it pays.

 True
 False 

If interest rates decline after a bond is issued and the investor reinvests the interest payment, the realized yield exceeds the yield to maturity.

 True
 False 

If preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

 True
 False 

From the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

 True
 False 

The prices of zero coupon bonds fluctuate less than bonds with large coupons.

 True
 False

The current yield on a long-term bond is the

	A.	coupon
	B.	going rate of interest
	C.	coupon interest divided by the price of the bond
	D.	interest paid, adjusted for price changes

If interest rates have fallen, a firm may prefer to repurchase the bonds on the market instead of calling and redeeming them.

 True
 False 

There is no secondary market for EE bonds.

 True
 False

Yields on municipal bonds exceed yields on corporate  bonds with the same term to maturity and credit rating.

 True
 False 

Build American bonds are not exempt from federal income taxation.

 True
 False

If interest rates are expected to rise, a prudent strategy would be to sell treasury bills and buy treasury bonds.

 True
 False 

Municipal bonds are more marketable than corporate and federal government bonds.

 True
 False 

Federal government debt is believed to have minimal default risk because the government has the power to tax and to create money.

 True
 False 

Some municipalities have their municipal bonds insured in order to facilitate marketing (issue) them.

 True
 False 

Investors who acquire indexed bonds (TIPS) avoid the risk associated with inflation.

 True
 False

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10 percent, the price of this preferred stock will be

	A.	$50
	B.	$75
	C.	$25
	D.	$100

Preferred stock pays a fixed amount of interest.

 True
 False 

While bond prices fluctuate,

	A.	yields are constant
	B.	the spread between yields is constant
	C.	coupons are constant
	D.	short-term bond prices fluctuate more

The value of a bond depends on
1. the coupon rate
2. the terms of the indenture
3. the maturity date
a. 1 and 2

	A.	1 and 3
	B.	all of the above
	C.	2 and 3

The current yield exceeds the yield to maturity if interest rates fall.

 True
 False

If a 7 percent, $1,000 bond matures after ten years and current interest rates are 9 percent, the current price of the bond should not be
1. $1,000
2. $872
3. $1,140

	A.	only 2
	B.	1 and 3
	C.	1 and 2
	D.	2 and 3

An individual may purchase preferred stock
1. in anticipation of lower interest rates
2. in anticipation of higher interest rates
3. to receive a flow of tax-free income
4. to receive a flow of income

	A.	2 and 3
	B.	1 and 3
	C.	2 and 4
	D.	1 and 4

Treasury bills

	A.	sell for a premium
	B.	mature after one year
	C.	sell at a discount
	D.	pay an established 4.5% annual interest

If interest rates increase,
1. the price of a Ginnie Mae falls
2. the price of a Ginnie Mae rises
3. the speed with which Ginnie Maes are retired increases
4. the speed with which Ginnie Maes are retired declines

	A.	2 and 3
	B.	1 and 4
	C.	2 and 4
	D.	1 and 3

The federal government only issues marketable securities such as treasury bills.

 True
 False 

Poor quality municipal bonds pay more interest than poor quality corporate debt.

 True
 False