Fixed Income【Reading 53】Sample following, describes, 2012, offering

mouse123

Which of the following contains the overall rights of the bondholders?

A) Covenant.

B) Rights offering.

C) Indenture.

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Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.

mouse123

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.

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Current ratio covenants are positive (borrower promises to perform) versus the others listed (prohibitions on the borrower).

mouse123

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.

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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.

mouse123

Which of the following bond covenants is considered negative?

A) No additional debt.

B) Payment of taxes.

C) Maintenance of collateral.

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Negative covenants set forth limitations and restrictions, whereas positive (affirmative) covenants set forth activities that the borrower promises to do.

mouse123

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.

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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.

mouse123

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.

mouse123

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.

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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. If the yield to maturity on a 2-year zero is 6%, we can say that the 2-year spot rate is 6%.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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.