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Exam 10: Fixed-Income Securities

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Question 51

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Which one of the following statements correctly describes the major drawback of a zero-coupon bond?

A) Unless the bond is held in a tax-sheltered account, the investor must pay taxes on the annual accrued interest even though no interest is actually received.
B) The conversion feature found on most zero-coupon bonds generally requires the investor to switch to a coupon-bearing bond after a period of 5 years.
C) The lack of an annual coupon basically prohibits the investor from locking in a high rate of return.
D) Because there is no reinvestment of a coupon payment, large capital losses accrue when interest rates decline.

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Question 52

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Which of the following statements are correct concerning municipal bonds? I.Yields on municipal bonds are usually lower than yields on Treasury bonds. II.Municipal bonds are most appealing to individuals with high incomes. III.Interest on a municipal bond is exempt from federal income tax. IV.Municipal bonds are less risky than Treasury bonds.

A) I, II, III and IV
B) I, II and III only
C) II, III and IV only
D) II and III only

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Question 53

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What is the tax-equivalent yield of a double tax-free 4% municipal bond if the investor is in the 33% federal and 6% state tax brackets?

Which one of the following combination of features causes bond prices to be the most volatile?

Liquid yield option notes or LYONS have which of the following characteristics? I.convertibility at a fixed conversion ratio II.high coupon rates III.a put feature that guarantees the right to redeem the bonds at a prespecified price IV.convertibility at a fixed conversion price

Which one of the following is the most junior in terms of its claim on earnings and assets?

The denomination of most corporate bonds is ________ and the maturities generally range from ________.

The bond market has occasionally outperformed the stock market for several years at a time.

LYON's or liquid yield option notes are a type of convertible security.

From the viewpoint of a U.S.resident, describe the merits of investing in foreign bonds.

Bondholders can earn income both from interest and from capital gains.

When convertible bonds are first issued I.the conversion price of the stock is higher than the market price. II.the market price of the stock is higher than the conversion price. III.the coupon rate is higher than if the bond were not convertible. IV.the coupon rate is lower than if the bond were not convertible.

Bonds are least likely to be called if

At the time you purchase a bond, you know the exact holding period return you will earn if

Which of the following statements about U.S.Agency bonds are true? I.They are backed by the "full faith and credit" of the U.S.government. II.Their risk is almost as low as government notes and bonds. III.Their yields are slightly higher than those of government securities. IV.They are exempt from state and federal taxes.

Kandy Korn Co.issued convertible bonds with a conversion ratio of 50.The most likely price of the stock at the time the bonds were issued was

A bond which has a deferred call

An increase in the market rate of interest can cause a bondholder to realize a capital loss on the sale of their bonds.

Issuers must redeem outstanding bonds for at least their par value.

Mortgage-backed bonds are issued primarily by state governments and are secured by home mortgages.