BCHAPTER 7 100% SOLVED QUESTIONS
AND ANSWERS
Solved
What do fixed income securities consist of? - debit instruments and preferred stock
What is a bond? - a debt security in which a borrower promises to pay a specified interest rate and
principal at a future date.
_______________________ are not completely risk-less, since their prices will decline when the interest
rate rises - treasury bonds
What is a treasury bond? - a marketable, fixed-interest U.S. government debt security with a maturity of
more than 10 years.
What is a municipal bond? - loans investors make to local governments. They are issued by cities, states,
counties, or other local governments.
What is a corporate bond? - a bond issued by a corporation in order to raise financing for a variety of
reasons such as to ongoing operations, M&A, or to expand business.
Describe par value? - refers to a bonds face value and the amount of money that the issuing entity
borrows and promises to repay on the maturity date
Describe "default" - a bond issuer is said to be in default if it does not pay the interest or the principal in
accordance with the terms of the indenture agreement or if it violates one or more of the issuers
restrictive covenants
What is an indenture? - the contract that describes the terms of a borrowing arrangement between a
firm that sells a bond issue and the investors who purchase the bond
What is a convertibility provision? - allows a bondholder or preferred stockholder to convert their bond
or preferred share, respectively, into a specified number or value of common shares.
What is a floating rate bond? - a bond for which the interest rate changes based on a benchmark interest
rate
What does a call provision do? - gives the issuer the right to call, and force the redemption of a bond at
specific times and under specific circumstances
What is a sinking fund provision? - requires the bond issuer to buy back a specified portion of the bond
issued each year.
What is the process of bond valuation based on? - the fundamental concept that the current price of a
security can be determined by calculating the present value of the cash flows that the security will
generate in the future
AND ANSWERS
Solved
What do fixed income securities consist of? - debit instruments and preferred stock
What is a bond? - a debt security in which a borrower promises to pay a specified interest rate and
principal at a future date.
_______________________ are not completely risk-less, since their prices will decline when the interest
rate rises - treasury bonds
What is a treasury bond? - a marketable, fixed-interest U.S. government debt security with a maturity of
more than 10 years.
What is a municipal bond? - loans investors make to local governments. They are issued by cities, states,
counties, or other local governments.
What is a corporate bond? - a bond issued by a corporation in order to raise financing for a variety of
reasons such as to ongoing operations, M&A, or to expand business.
Describe par value? - refers to a bonds face value and the amount of money that the issuing entity
borrows and promises to repay on the maturity date
Describe "default" - a bond issuer is said to be in default if it does not pay the interest or the principal in
accordance with the terms of the indenture agreement or if it violates one or more of the issuers
restrictive covenants
What is an indenture? - the contract that describes the terms of a borrowing arrangement between a
firm that sells a bond issue and the investors who purchase the bond
What is a convertibility provision? - allows a bondholder or preferred stockholder to convert their bond
or preferred share, respectively, into a specified number or value of common shares.
What is a floating rate bond? - a bond for which the interest rate changes based on a benchmark interest
rate
What does a call provision do? - gives the issuer the right to call, and force the redemption of a bond at
specific times and under specific circumstances
What is a sinking fund provision? - requires the bond issuer to buy back a specified portion of the bond
issued each year.
What is the process of bond valuation based on? - the fundamental concept that the current price of a
security can be determined by calculating the present value of the cash flows that the security will
generate in the future
