Reading 60: Features of Debt Securities LOSb习题精选 2010, represents, following, features

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LOS b, (Part 1): Describe the basic features of a bond.

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

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

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.

 

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Which of the following statements concerning coupon rate structures is least accurate?

A) Accrual bonds have only one cash inflow at maturity.

B) Zero-coupon bonds have only one cash inflow at maturity.

C) Accrual bonds, like zero-coupon bonds, always sell at a discount to face value.

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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.

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LOS b, (Part 3): Describe the structure of floating-rate securities.

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) 3.875%.

B) 3.250%.

C) 7.750%.

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This value is computed as follows:

Semi-annual coupon = (LIBOR + 125 basis points) / 2 = 3.875%

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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 TRUE with regard to floating rate issues that have caps and floors?

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

B) 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.

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

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

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

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.

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Which of the following statements regarding zero-coupon bonds is TRUE?

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.

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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.

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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.

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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.

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Which of the following statements about zero-coupon bonds is FALSE?

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.

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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.

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LOS b, (Part 2): Describe the various coupon rate structures.

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

A) Price appreciation creates only some of the zero-coupon bond's return.

B) Spot interest rates will never vary across time.

C) A coupon bond can be viewed as a collection of zero-coupon bonds.

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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.

 

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

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

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

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

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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.