Fixed Income HW and Test Banks (Answered) Complete Solution

Fixed Income HW and Test Banks (Answered) Complete Solution These are legally enforceable rules that borrowers and lenders agree on at the time of a new bond issue. What are these rules called? a. Collateral b. Covenants c. Seniority ranking d. Credit enhancement b. Covenants The provision that provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond's maturity date is referred to as: a. a put provision b. a call provision c. a conversion provision d. a negative covenant a. a put provision Which provision in the bond indenture reduces credit risk? a. Step-up coupon bonds b. Sinking fund arrangement c. Deferred coupon bonds d. Payment-in-kind (PIK) coupon bonds b. Sinking fund arrangement What is false about fixed income securities? a. Examples of negative covenants include restrictions on debt, restrictions on distributions to shareholders, restrictions on asset disposals, restrictions on investments, and restrictions on mergers and acquisitions. b. The sources of bond returns are generally capital gains and coupons. c. A callable bond has all the principal repaid at the maturity date if it is called. d. Unlike stocks, fixed income securities have asymmetric returns. c. A callable bond has all the principal repaid at the maturity date if it is called. Relative to an otherwise similar option-free bond, a: a. convertible bond will trade at a higher price. b. callable bond will trade at a lower yield. c. callable bond will trade at a higher price. d. putable bond will trade at a higher price. a. convertible bond will trade at a higher price. Which is NOT included in the bond indenture? a. Current bond price b. Maturity c. Par value d. Coupon rate a. Current bond price What is the lowest long-term investment-grade credit rating of S&P? Write down the rating symbol. BBB- Which coupon payment structure does not affect credit risk? a. Floating-rate notes b. Deferred coupon bonds c. Step-up coupon bonds d. Payment-in-kind (PIK) coupon bonds a. Floating-rate notes This is a hybrid security with both debt and equity features. The bondholder has the right to exchange the bond for a specified number of common shares in the issuing company. What is the name of this security? a. Preferred stock b. Index-linked bond c. Callable bond d. Convertible bond d. Convertible bond What are not coupon-bearing securities (what are amortizing bonds)? a. Corporate bonds b. Treasury notes c. Municipal bonds d. Mortgage-backed securities d. Mortgage-backed securities How do you measure the liquidity risk of the bonds? a. bid-ask spread b. bond rating c. yield to maturity d. bond price a. bid-ask spread 0.05% is equal to what basis points (bp)? a. 0.05 bp b. 0.5 bp c. 5 bp d. 50 bp c. 5 bp What is NOT true about the current yield to maturity on the bond? a. It is based on the assumption that all future coupon payments will be reinvested at the current yield to maturity. b. It is based on the assumption that all future coupon payments will be reinvested at the coupon rate. c. It is based on the assumption that the bond is held to maturity. d. It is the discount rate, which will set the present value of the future coupon and principal payments equal to the current bond price. b. It is based on the assumption that all future coupon payments will be reinvested at the coupon rate. Which statement is false? a. Floating rate coupon bonds have lower interest rate risk than fixed rate coupon bonds for investors. b. Bonds with public offerings are more liquid than those with private placements. c. Coupon income of most municipal bonds is exempt from state and federal income taxes d. The variability of the coupon rate on a Libor-based floating-rate bond is most likely due to market-based reassessments of the issuer's creditworthiness. d.