1. The quality ratings assigned to bonds reflect the:
|a.||probability of their face value increasing to above their market value.|
|b.||probabilities of their going into default.|
|c.||probabilities of different returns on their sinking fund investments.|
|d.||probabilities of their maturity value becoming lower than the principal value.|
|e.||probabilities of their being recalled by the exercise of a call provision.|
2. Which of the following is a result of setting the coupon rate on a bond immediately before it is issued?
|a.||The coupon rate is equal to the yield to maturity on the bond.|
|b.||The market interest rate is equal to the coupon rate of the bond.|
|c.||The yield to maturity is equal to the market yield on the bond.|
|d.||The issuing price equals the face (par) value of the bond.|
|e.||The market value is equal to the maturity value of the bond.|
3. The average rate of return earned on a bond if it is held until the first call date is the:
|a.||yield to call.|
|b.||yield to market.|
|c.||yield to principal price.|
|d.||yield to issue price.|
|e.||yield to discount.|
4. A call provision gives bondholders the right to demand, or “call for,” the repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.
5. As junk bonds are such high-risk instruments, the returns on such bonds aren’t very high.
6. An increase in interest rates will increase the future value of a portfolio because the cash flows produced by the portfolio:
|a.||will increase the maturity value of the bond.|
|b.||can be reinvested at higher rates of return.|
|c.||can be used to recall high-rate bonds.|
|d.||will generate cash to pay future coupon interest.|
|e.||will decrease the yield to maturity of the bond.|
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