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Qualitative Bond Questions
Multiple Choice.
1. When investors require a return that is higher than the bond’s coupon rate, the bond will sell:
a. above par2. Ceteris Paribus, the nearer to maturity, the ________.
b. at par
c. below par
d. impossible to tell.
a. closer the bond will trade to par value.3. When the credit rating of an ordinary plan vanilla corporate bond is downgraded, the bond responds in which one of the following ways:
b. less interest rate sensitive the bond will be.
c. shorter the bond’s duration.
d. All of the above
a. The bond’s yield to maturity rises4. Which one of the following types of investments experiences the least interest rate risk?
b. The bond’s market price rises
c. The bond’s coupon rate falls
d. The bond’s indenture contract is revised
a. Zero coupon bonds5. Investing in zero coupon bonds will accomplish all of the following except which one?
b. Long-term government bonds
c. Preferred Stock
d. Long-term corporate bonds
e. Short-term treasury bills
a. Delay income tax payments until the bond matures6. Which of the following is true?
b. Simplify duration calculations
c. Eliminate reinvestment rate risk
d. Eliminate the need to find investments for periodic cash flows.
a. YTM is dependent on both interest income as well as capital gains.7. Why do firms issue debt?
b. The closer to maturity, the less sensitive a bond is to interest rate risk.
c. Callable debt is debt that may be paid off early.
d. all of the above are true.
a. managers like to have debt on the balance sheet as it gives them more discretion as to investment than does equity.8. Convertible debt is debt that ________.
b. debt has a lower cost than equity.
c. debt decreases the financial leverage of the firm
d. none of the above
a. the issuing firm can convert into common stock.9. Which of the following is TRUE?
b. the issuing firm can pay off early.
c. the bondholder can sell back to the firm at a guaranteed price.
d. the bondholder can convert into shares.
a. Most corporate bonds in the US pay interest annually.10. In the event of a bankruptcy ______.
b. The YTM for a bond selling at a discount is greater than the bond’s coupon rate.
c. To most individuals, corporate bonds have several tax disadvantages over common stock.
d. Debt lowers a firm’s risk of financial distress.
a. bondholders get paid before shareholders.Answers
b. Jr. Bonds holders get paid before Sr. Bond holders (ladies and children first!)
c. the bondholders and other credit holders are guaranteed their initial investment back.
d. all of the above
| 1. c | 6. d |
| 2. d | 7. b |
| 3. a | 8. d |
| 4. e | 9. c |
| 5. a | 10. a |
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