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标题: Fixed Income【Reading 53】Sample [打印本页]
作者: mouse123    时间: 2012-3-30 15:49     标题: [2012 L1] Fixed Income【Session 15 - Reading 53】Sample

Which of the following contains the overall rights of the bondholders?
A)
Covenant.
B)
Rights offering.
C)
Indenture.


Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.
作者: mouse123    时间: 2012-3-30 15:50

Which of the following is NOT a negative bond covenant?
A)
Credit rating must be investment grade.
B)
Current ratio of at least 2.25.
C)
Restriction on asset sales.


Current ratio covenants are positive (borrower promises to perform) versus the others listed (prohibitions on the borrower).
作者: mouse123    时间: 2012-3-30 15:50

Which of the following is an example of a positive covenant? The company:
A)
must not use the same collateral to back more than one debt obligation.
B)
may not sell fixed assets that have been pledged as collateral for the bonds.
C)
must maintain a times interest earned ratio of at least two times.


Positive covenants specify what the company must do, negative covenants specify what they must not do. Both of the alternatives are examples of negative covenants.
作者: mouse123    时间: 2012-3-30 15:50

Which of the following bond covenants is considered negative?
A)
No additional debt.
B)
Payment of taxes.
C)
Maintenance of collateral.


Negative covenants set forth limitations and restrictions, whereas positive (affirmative) covenants set forth activities that the borrower promises to do.
作者: mouse123    时间: 2012-3-30 15:51

Which of the following statements regarding zero-coupon bonds and spot interest rates is most accurate?
A)
A coupon bond can be viewed as a collection of zero-coupon bonds.
B)
Price appreciation creates only some of the zero-coupon bond's return.
C)
Spot interest rates will never vary across time.


Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. Spot rates are defined as interest rates used to discount a single cash flow to be received in the future. Any bond can be viewed as the sum of the present value of its individual cash flows where each of those cash flows are discounted at the appropriate zero-coupon bond spot rate.
作者: mouse123    时间: 2012-3-30 15:51

A coupon bond:
A)
does not pay interest on a regular basis, but pays a lump sum at maturity.
B)
pays interest on a regular basis (typically semi-annually).
C)
always sells at par.


This choice accurately describes a coupon bond.
With an accrual bond, payments are deferred to maturity and then disbursed along with the par value at maturity. Unlike a normal zero-coupon bond, these issues are sold at (or near) their par values and then the interest accrues at a compound rate on top of that. So, they start at $1,000 and then appreciate from there.
作者: mouse123    时间: 2012-3-30 15:51

Which of the following statements regarding zero-coupon bonds and spot interest rates is CORRECT?
A)
Price appreciation creates all of the zero-coupon bond's return.
B)
If the yield to maturity on a 2-year zero coupon bond is 6%, then the 2-year spot rate is 3%.
C)
Spot interest rates will never vary across the term structure.


Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. Spot rates are defined as interest rates used to discount a single cash flow to be received in the future. If the yield to maturity on a 2-year zero is 6%, we can say that the 2-year spot rate is 6%.
作者: mouse123    时间: 2012-3-30 15:52

Which of the following statements regarding zero-coupon bonds is CORRECT?
A)
Zero-coupon bonds have substantial amount of coupon reinvestment risk.
B)
An investor who holds a zero-coupon bond until maturity will receive an annuity of coupon payments plus recovery of principal at maturity.
C)
An investor who holds a zero-coupon bond until maturity will receive a return equal to the bond's effective annual yield.


Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. An investor who holds a zero-coupon bond until maturity will receive a return equal to the bond’s effective annual yield.
作者: mouse123    时间: 2012-3-30 15:52

Which of the following statements about zero-coupon bonds is NOT correct?
A)
The lower the price, the greater the return for a given maturity.
B)
All interest is earned at maturity.
C)
A zero coupon bond may sell at a premium to par when interest rates decline.


Zero coupon bonds always sell below their par value, or at a discount prior to maturity. The amount of the discount may change as interest rates change, but a zero coupon bond will always be priced less than par.
作者: mouse123    时间: 2012-3-30 15:53

Which of the following statements concerning coupon rate structures is least accurate?
A)
Accrual bonds have only one cash inflow at maturity.
B)
Accrual bonds, like zero-coupon bonds, always sell at a discount to face value.
C)
Zero-coupon bonds have only one cash inflow at maturity.


Accrual bonds, unlike zero-coupon bonds, do not always sell at a discount to face value. The interest accrues forward and thus the bonds are likely to sell for more than face value.
作者: mouse123    时间: 2012-3-30 15:53

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.


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.
作者: mouse123    时间: 2012-3-30 15:53

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.


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.
作者: mouse123    时间: 2012-3-30 15:54

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.

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.
作者: mouse123    时间: 2012-3-30 15:54

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%.


This value is computed as follows:
Semi-annual coupon = (LIBOR + 125 basis points) / 2 = 3.875%
作者: mouse123    时间: 2012-3-30 15:54

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.


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.
作者: mouse123    时间: 2012-3-30 15:55

Which one of the following combinations represents an accurate classification of security owner options and security issuer options?
Security Owner OptionsSecurity Issuer Options
A)
A call provision A prepayment option
B)
A floorA prepayment option
C)
A capAn accelerated sinking fund


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.
作者: mouse123    时间: 2012-3-30 15:55

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.


The dollar amount of the coupon payment is computed as follows:
Coupon in $ = $5,000 × 0.085 / 2 = $212.50
作者: mouse123    时间: 2012-3-30 15:55

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


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.
作者: mouse123    时间: 2012-3-30 15:56

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.


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.
作者: mouse123    时间: 2012-3-30 15:56

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.


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.
作者: mouse123    时间: 2012-3-30 15:56

Which of the following statements regarding accrued interest on a bond is most accurate?
A)
If the buyer must pay the seller the accrued interest, the bond is said to be trading ex-coupon.
B)
The bond is trading flat if the bond issuer is in default and the bond is trading without accrued interest.
C)
The accrued interest is paid by the seller of the bond to the buyer (new owner) of the bond.


The accrued interest is paid by the new owner of the bond to the seller of the bond. If the buyer must pay the seller accrued interest, the bond is said to be trading cum-coupon. Otherwise, it is trading ex-coupon.
作者: mouse123    时间: 2012-3-30 15:56

In the context of bonds, accrued interest:
A)
equals interest earned from the previous coupon to the sale date.
B)
is discounted along with other cash flows to arrive at the dirty, or full price.
C)
covers the part of the next coupon payment not earned by seller.


This is a correct definition of accrued interest on bonds.
The other choices are false. Accrued interest is not discounted when calculating the price of the bond. The statement, "covers the part of the next coupon payment not earned by seller," should read, "…not earned by buyer."
作者: mouse123    时间: 2012-3-30 15:57

If the issuer of a bond is in default, the bond will be trading:
A)
flat.
B)
on accrual.
C)
off the market.


If an issuer of a bond is in default (i.e., it has not been making periodic contractual coupon payments), the bond is traded without accrued interest and is said to trade flat.
作者: mouse123    时间: 2012-3-30 15:57

A 5% coupon bond with semi-annual coupon payments on a coupon payment date when the coupon has not been paid yet and the bond has a $1,000 par value. What is the accrued interest of the bond and what is the bond's full price?
Accrued Interest Full Price
A)
$25 $1,000
B)
$50 $1,050
C)
$25 $1,025


Accrued interest is found by simply dividing the coupon rate by two and then multiplying the result by $1,000. The full price or dirty price of the bond is the price of the bond plus accrued interest, if any.
作者: mouse123    时间: 2012-3-30 15:58

Assume a bond's quoted price is 105.22 and the accrued interest is $3.54. The bond has a par value of $100. What is the bond's clean price?
A)
$103.54.
B)
$108.76.
C)
$105.22.


The clean price is the bond price without the accrued interest so it is equal to the quoted price.
作者: mouse123    时间: 2012-3-30 15:58

Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. If Traynor pays the dirty price, how much will the seller receive at the settlement date?
A)
$1,081.00.
B)
$1,014.00.
C)
$1,047.50.


The dirty price is equal to the agreed upon, or quoted price, plus interest accrued from the last coupon date. Here, the quoted price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the dirty price = 1,047.50 + 33.50 = 1,081.00.
作者: mouse123    时间: 2012-3-30 15:58

Which of the following statements about refunding and redemption is most accurate?
A)
Bonds redeemed at the special redemption price are typically redeemed at par.
B)
An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond.
C)
A sinking fund is an example of refunding.


This statement is accurate. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." When bonds are redeemed under the call provisions specified in the bond indenture, these are known as a regular redemptions and the call prices are referred to as "regular redemption prices."  
The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A bond that is callable but nonrefundable can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue.
作者: clearlycanadian    时间: 2012-3-30 16:00

Which of the following is CORRECT about the call feature of a bond? It:
A)
stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.
B)
stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.
C)
describes the maturity date of the bond.

Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are “called,” the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue.
Call provisions do not pertain to maturity. A put provision gives the bondholders certain rights regarding early payment of principal.
作者: clearlycanadian    时间: 2012-3-30 16:00

Which of the following is most accurate about a bond with a deferred call provision?
A)
It could be called at any time during the initial call period, but not later.
B)
Principal repayment can be deferred until it reaches maturity.
C)
It could not be called right after the date of issue.


A deferred call provision means the issue is initially (say, for the first 5 to 7 years) non-callable, after which time it becomes freely callable. In other words, there is a deferment period during which time the bond cannot be called, but after that, it becomes freely callable.
作者: clearlycanadian    时间: 2012-3-30 16:01

Most often the initial call price of a bond is its:
A)
par value plus one year's interest.
B)
par value.
C)
principal plus a premium.


Customarily, when a bond is called on the first permissible call date, the call price represents a premium above the par value. If the bonds are not called entirely or not called at all, the call price declines over time according to a schedule. For example, a call schedule may specify that a 20-year bond issue can be called after 5 years at a price of 110. Thereafter, the call price declines by a dollar a year until it reaches 100 in the fifteenth year, after which the bonds can be called at par.
作者: clearlycanadian    时间: 2012-3-30 16:01

The annual Fixed Income Analysts' Forum had just ended and two attendees, James Purcell and Frederick Hanes, were discussing some of the comments made by the panelists. Purcell and Hanes were specifically concerned with the following two statements that were made:

Panelist 1: Mortgage-backed securities and asset-backed securities are both fixed income securities that are backed by pools of loans and are said to be amortizing securities. For many of the loans, no principal payments are required to be made prior to the maturity date. These securities are said to have a bullet maturity structure.
Panelist 2: If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are putable bonds; if the principal is to be repaid over time at the option of the bondholder, then the bonds are termed callable bonds.

With regard to the statements made by Panelist 1 and Panelist 2:
A)
both are incorrect.
B)
both are correct
C)
only one is correct.


Panelist 1 is incorrect. These securities do not have a bullet maturity structure. The payments are structured so that the loan is paid off when the last loan payment is made.

Panelist 2 is incorrect. If coupon Treasury bonds or corporate bonds are issued with the terms specifying that the principal be repaid over time at the option of the issuer, then these bonds are callable bonds – the call provision grants the issuer an option to retire part of the issue or the entire issue prior to the maturity date. On the other hand, if the principal is to be repaid over time at the option of the bondholder, then these bonds are putable bonds – the put provision entitles the bondholder to put (sell) the issue back to the issuer at the put price (if interest rates increase and the bond’s price declines below the put price).
作者: clearlycanadian    时间: 2012-3-30 16:02

Which of the following statements regarding nonrefundable bonds is most accurate? Nonrefundable bonds:
A)
must be refunded from funds generated from operations, not from outside sources of capital such as new debt or equity issues.
B)
may only be called if the source of funds for the redemption is other than a new bond issue with a lower coupon rate.
C)
and noncallable bonds are essentially the same.


Nonrefundable bonds may be called as long as the firm does not use less expensive debt to do so. They may be refunded with outside capital, just not cheaper debt.
作者: clearlycanadian    时间: 2012-3-30 16:02

Which of the following statements regarding a bond being called is CORRECT? Call prices are known as regular redemption prices when bonds are called at:
A)
under the call provisions specified in the bond indenture.
B)
at the par value.
C)
at a premium.


When bonds are redeemed under the call provisions specified in the bond indenture, these are known as regular redemptions and the call prices are referred to as regular redemption prices which can be either at a premium or at par.
作者: clearlycanadian    时间: 2012-3-30 16:03

Which of the following is the appropriate redemption price when bonds are called according to the sinking fund provision?
A)
Specific redemption price.
B)
Regular redemption price.
C)
Special redemption price.


Regular redemption price refers to bonds being called according to the provisions specified in the bond indenture. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." There is no such thing as a specific redemption price.
作者: clearlycanadian    时间: 2012-3-30 16:03

Which of the following is the appropriate redemption price when redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes?
A)
Regular redemption price.
B)
General redemption price.
C)
Special redemption price.


When redemption funds are obtained as a result of a forced sale of assets for deregulatory purposes, the funds can be used to redeem bonds at the special redemption price, which are typically par value.
作者: clearlycanadian    时间: 2012-3-30 16:03

On November 15, 2006, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 2026. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued?
A)
Bullet maturity.
B)
Serial bonds.
C)
Income bonds.


These bonds have a bullet maturity structure because the issuer has agreed to pay the entire amount borrowed in one lump-sum payment at maturity.
作者: clearlycanadian    时间: 2012-3-30 16:04

Which of the following statements regarding a sinking fund provision is most accurate?
A)
It requires that the issuer set aside money based on a predefined schedule to accumulate the cash to retire the bonds at maturity.
B)
It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.
C)
It permits the issuer to retire more than the stipulated sinking fund amount if they choose.


A sinking fund actually retires the bonds based on a schedule. This can be accomplished through either payment of cash or through the delivery of securities. An accelerated sinking fund provision allows the company to retire more than is stipulated in the indenture.
作者: clearlycanadian    时间: 2012-3-30 16:04

The refunding provision found in nonrefundable bonds allows bonds to be retired unless:
A)
the funds come from the sale of new common stock.
B)
market interest rates have increased substantially.
C)
the funds come from a lower cost bond issue.


Refunding from a new debt issue at a higher interest rate is not prohibited, however their purchase cannot be funded by the simultaneous issuance of lower coupon bonds.
作者: clearlycanadian    时间: 2012-3-30 16:05

Which of the following embedded options benefits the bond investor?
A)
Call provision.
B)
Prepayment option.
C)
Put provision.


A put provision allows the investor to put the bond back to the issuer.
作者: clearlycanadian    时间: 2012-3-30 16:06

Which of the following embedded options most likely benefits the bondholder?
A)
Prepayment option on an amortizing security.
B)
Interest rate cap on a floating-rate bond.
C)
Put provision at par on a bond that is trading at a premium.


A put provision is an option that is exercisable by, and therefore potentially of benefit to, the bondholder. Even though the put is out of the money, it still has value to the bondholder. Interest rate caps and prepayment options both potentially benefit the issuer of the bond.
作者: clearlycanadian    时间: 2012-3-30 16:07

Which of the following statements regarding financing bond purchases with margin accounts is NOT correct?
A)
The required margin percentage changes daily.
B)
In the U.S., margin accounts are regulated by the Federal Reserve.
C)
Individuals are more likely than institutions to use margin accounts to finance bond purchases.


The margin percentage is fixed by contract. The required margin dollars may vary from day to day due to fluctuations in the underlying collateral.
作者: clearlycanadian    时间: 2012-3-30 16:07

Which of the following statements regarding financing bond purchases is CORRECT?
A)
The rate the investor pays on the loan in a margin transaction is known as the call money rate.
B)
Purchasing securities on margin allows investors to leverage assets and make larger purchases.
C)
In margin transactions, the broker borrows from the bank at the call money rate plus a spread.

Example: An investor has $5,000 cash, but wants to buy ten $1,000 face value bonds at par (for a total of $10,000). With cash only, he can only purchase five of the bonds. With a 50% margin account, he can buy all ten bonds ($5,000 cash equity contribution and $5,000 from the margin account). With the margin account, he will realize the gain or loss on all ten bonds rather than the five he could have purchased with cash only.
The statements about the rates paid by the parties to a margin transaction are reversed. The statement, “In margin transactions, the broker borrows from the bank at the call money rate plus a spread,” should read, “…borrows…at the call money rate.” The statement, “The rate the investor pays on the loan in a margin transaction is known as the call money rate.” should read, “…known as the call money rate plus a spread.” Remember that the broker needs to make profit, so the investor will pay a rate higher than the broker pays to the bank.



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