LOS h: Describe the characteristics and motivation for the various types of debt issued by corporations (including corporate bonds, medium-term notes, structured notes, commercial paper, negotiable CDs, and bankers acceptances).

Q1. Which of the following statements concerning taxable bonds is most accurate?

A)   Treasuries have the lowest yields, followed by agencies, then by corporates, which provide the highest returns.

B)   Treasuries have the lowest yields, followed by corporates, then by agencies, which provide the highest returns.

C)   Corporates have the lowest yields, followed by Treasuries, then by corporates, which provide the highest returns.

Q2. What is the typical face value of a corporate bond?

A)   $100,000.

B)   $100.

C)   $1,000.

Q3. Which of the following statements concerning corporate bonds is most accurate? The denomination is usually:

A)   $1,000, and the maturities usually range from 10 to 20 years.

B)   $1,000, and the maturities usually range from 5 to 10 years.

C)   $100,000, and the maturities usually range from 5 to 10 years.

Q4. Which of the following attributes does NOT describe commercial paper?

A)   The most common maturity is 50 days or less.

B)   All commercial paper must be registered with the Securities and Exchange Commission (SEC).

C)   It is typically issued as a zero coupon instrument.

Q5. Which of the following statements accurately describes direct and dealer paper?

A)   Direct paper tends to incur more issue costs versus dealer paper.

B)   The majority of direct paper issuers are financial companies.

C)   Direct paper is the same as dealer paper.

LOS h: Describe the characteristics and motivation for the various types of debt issued by corporations (including corporate bonds, medium-term notes, structured notes, commercial paper, negotiable CDs, and bankers acceptances).fficeffice" />

Q1. Which of the following statements concerning taxable bonds is most accurate?

A)   Treasuries have the lowest yields, followed by agencies, then by corporates, which provide the highest returns.

B)   Treasuries have the lowest yields, followed by corporates, then by agencies, which provide the highest returns.

C)   Corporates have the lowest yields, followed by Treasuries, then by corporates, which provide the highest returns.

Correct answer is A)

The difference in yields is largely due to the default risk premium. Treasuries are considered to be default-risk free, while corporate bonds have the highest default risk.

Q2. What is the typical face value of a corporate bond?

A)   $100,000.

B)   $100.

C)   $1,000.

Correct answer is C)

The most common face value of a corporate bond is $1,000.

Q3. Which of the following statements concerning corporate bonds is most accurate? The denomination is usually:

A)   $1,000, and the maturities usually range from 10 to 20 years.

B)   $1,000, and the maturities usually range from 5 to 10 years.

C)   $100,000, and the maturities usually range from 5 to 10 years.

Correct answer is B)

Corporate bonds usually have a face value of $1,000 and mature between 5 and 10 years.

Q4. Which of the following attributes does NOT describe commercial paper?

A)   The most common maturity is 50 days or less.

B)   All commercial paper must be registered with the Securities and Exchange Commission (SEC).

C)   It is typically issued as a zero coupon instrument.

Correct answer is B)

According to the Securities Act of 1933, commercial paper must be registered with the SEC. However, there are special provisions that exempt commercial paper form registration if the maturity is less than 270 days.

Q5. Which of the following statements accurately describes direct and dealer paper?

A)   Direct paper tends to incur more issue costs versus dealer paper.

B)   The majority of direct paper issuers are financial companies.

C)   Direct paper is the same as dealer paper.

Correct answer is B)

Dealer paper is issued via agents, whereas direct paper is issued directly by the issuer. Since it is issued directly by the company, direct paper is less expensive to issue.

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