mouse123

If the issuer of a bond is in default, the bond will be trading:

A) flat.

B) on accrual.

C) off the market.

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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.

mouse123

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.

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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."

mouse123

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.

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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.

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.

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

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

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 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 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

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%