mouse123

Which of the following statements regarding spot rates and zero-coupon bonds is least accurate?

A) With zero coupon bonds, investors have no reinvestment risk.

B) The yield to maturity on a zero coupon bond is called the spot interest rate.

C) The graph of current corporate bond yields is called the spot yield curve.

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The graph of yields on zero-coupon bonds (spot rates) is called the spot yield curve. Note that the return on zero-coupon bonds is based entirely on price appreciation. An investor in a default-free zero-coupon bond will not have to worry about reinvesting coupons to realize the yield to maturity.

mouse123

Sometimes floating rate issues have caps and/or floors, which limit the maximum or minimum coupon rate that the issue will pay. Which of the following statements is CORRECT with regard to floating rate issues that have caps and floors?

A) A floor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.

B) A cap is an advantage to the bondholder while a floor is an advantage to the issuer.

C) A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer.

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A cap limits the upside potential of the coupon rate paid on the floating rate bond and is therefore a disadvantage to the bondholder. A floor limits the downside potential of the coupon rate and is therefore a disadvantage to the bond issuer.

mouse123

Allcans, an aluminum producer, needs to issue some debt to finance expansion plans, but wants to hedge its bond interest payments against fluctuations in aluminum prices. Jerrod Price, the company’s investment banker, suggests a non-interest rate index floater. This type of bond will provide all the following advantages EXCEPT:

A) the bond agreement allows Allcans to set coupon payments based on business results.

B) the bond's coupon rate is linked to the price of aluminum.

C) the payment structure helps protect Allcan's credit rating.

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The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally. Non-interest rate indexed floaters are indexed to a commodity price such as oil or aluminum. Business results could be impacted by numerous factors other than aluminum prices.
Both of the other choices are true. By linking the coupon payments directly to the price of aluminum (meaning that when aluminum prices increase, the coupon rate increases and vice versa), the non-interest index floater allows Allcans to protect its credit rating during adverse circumstances.

mouse123

Consider a floating rate issue that has a coupon rate that is reset on January 1 of each year. The coupon rate is defined as one-year London Interbank Offered Rate (LIBOR) + 125 basis points and the coupons are paid semi-annually. If the one-year LIBOR is 6.5% on January 1, which of the following is the semi-annual coupon payment received by the holder of the issue in that year?

A) 3.250%.

B) 7.750%.

C) 3.875%.

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This value is computed as follows:
Semi-annual coupon = (LIBOR + 125 basis points) / 2 = 3.875%

mouse123

A bond issued by the government of Italy is likely to be denominated in which one of the following currencies?

A) Euros.

B) U.S. dollars.

C) Swiss francs.

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Bonds issued by governments are likely to be denominated in the currency of the country where the bond is issued. In this case, the Euro is the Italian currency and bonds issued by the Italian government would normally be issued in Euros.

mouse123

Which one of the following combinations represents an accurate classification of security owner options and security issuer options?

Security Owner Options

Security Issuer Options

A) A call provision A prepayment option

B) A floor A prepayment option

C) A cap An accelerated sinking fund

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A floor sets a minimum coupon rate for a floating-rate bond and protects the security owner from decreases in rates. A prepayment option is included in many amortizing securities and allows the holder of the option to make additional payments against outstanding principal.

mouse123

A bond has a par value of $5,000 and a coupon rate of 8.5% payable semi-annually. The bond is currently trading at 112.16. What is the dollar amount of the semi-annual coupon payment?

A) $238.33.

B) $425.00.

C) $212.50.

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The dollar amount of the coupon payment is computed as follows:
Coupon in $ = $5,000 × 0.085 / 2 = $212.50

mouse123

Which one of the following alternatives represents the correct series of payments made by a typical 6% U.S. Treasury note with a par value of $100,000 issued today with five years to maturity?

Number and size of each intermediate payment

Payment made at maturity

A) 9 semiannual payments of $3,000 $103,000

B) 4 annual payments of $6,000 $106,000

C) 9 semiannual payments of $3,000 $100,000

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Payments for U.S. Treasury bonds and notes are semiannual and are fixed for the life of each bond or note. The coupon rate is quoted on an annual basis but each payment is made on the basis of one half the annual rate multiplied by the maturity or par value.

mouse123

Peter Stone is considering buying a $100 face value, semi-annual coupon bond with a quoted price of 105.19. His colleague points out that the bond is trading ex-coupon. Which of the following choices best represents what Stone will pay for the bond?

A) $105.19 plus accrued interest.

B) $105.19 minus the coupon payment.

C) $105.19.

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Since the bond is trading ex-coupon, the buyer will pay the seller the clean price, or the price without accrued interest. So, Stone will pay the quoted price.
The choice $105.19 plus accrued interest represents the dirty price (also known as full price). This bond would be said to trade cum-coupon.

mouse123

The dirty, or full, price of a bond:

A) is paid when a security trades ex-coupon.

B) applies if an issuer has defaulted.

C) equals the present value of all cash flows, plus accrued interest.

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The dirty price of a bond equals the quoted price plus accrued interest.
If an issuer has defaulted, the bond trades without interest and is said to trade flat. When a security trades ex-coupon, the buyer pays the clean price, which is the quoted price without accrued interest.