Multiple Choice Questions:

Which of the following is True?

The cash flow on a floater is fixed until maturity

A floater is subject to no risk because the rate on it adjust to the market.

The cash flow on a floater adjusts to changes in its credit risk.

Floater bonds are zero coupon bonds whose price floats as market interest rates change.

The coupon on a floater varies according to a formula based on a reference interest rate and a margin.

Which of the following is False?

Deferred coupon bonds:

Are coupon bonds that allow the issuer to avoid using cash to make interest payments for a specified number of years.

Include deferred-interest bonds, step-up bonds, and payment-in-kind bonds.

Provide the issuer with an advantage, so they have to pay a higher yield.

All of the above are true

None of the above are true.

Which of the following is false?

A linker is an inflation-linked bond.

A linker is a bond whose interest rate is tied to the rate of inflation.

The U.S. Treasury issues linkers. They are referred to as Treasury Inflation Protection Securities (TIPS).

STRIPS are inflation-indexed bonds.

LBO is the acquisition of another company using a significant amount of borrowed money (bonds or loans).

Which of the following is false:

For Inverse-floating-rate bonds:

The coupon rate moves in the opposite direction of the reference rate

The face value moves in the opposite direction of the reference rate

minus the coupon rate of the corresponding floater.

d. When market interest rates fall in general, inverse floaters pay a bigger coupon.

e. The par value of the inverse-floater equals the par value of the collateral minus the par value of the corresponding floater.

Which of the following is False?

An amortizing security is a zero-coupon security

An amortizing security is a debt security in which a portion of the principal is paid to security holder every period, in addition to the periodic interest payment.

In an amortizing security, repayment of the principal occurs over the life of the bond according to an amortization schedule.

Home mortgage loans and auto loans are often structured as amortizing securities.

The maturity of amortizing securities is not a useful measure in terms of identifying when the principal is repaid.

Which of the following is False?

A bond with an embedded option gives either the bondholder and/or the issuer an option to take some action against the other party.

The issuer of an amortizing bond may have the option to alter the amortization schedule for amortizing securities.

A callable bond gives the issuer an option to retire the bond, fully or partially, before the scheduled maturity date. Hence, it has to pay a higher return.

A putable bond gives the bond holder an option to sell the issue back to the issuer at par value on designated dates. Hence, it pays a lower yield.

All of the above are false

Which of the following is True?

The advantage of a call provision for an issuer is that it can replace an old bond issue with a lower-interest cost issue if interest rates in the market decline.

The advantage of a call provision to the issuer is that it effectively allows the issuer to alter the maturity of the bond.

The right to call a security gives the borrower the right to pay off the security, in whole or in part, prior to the stated maturity date.

The disadvantages of a call provision for the bondholder is that the cash flow pattern of the bond is not known with certainty and the investor is exposed to reinvestment risk.

All of the above are true

Which of the following is False?

An issue with a put provision allows the bondholder to sell the issue back to the issuer at par value on designated dates.

The advantage to the bondholder with a put option is the possibility that if interest rates rise after the issue date, the bondholder can force the issuer to redeem the bond at par value.

Convertible bonds give bondholders the right to exchange their bonds for a specified number of shares of common stock of the same company.

Exchangeable bonds allow bondholders to exchange their bonds for a specified number of common stock shares of a corporation different from the issuer of the bond.

Bonds with a put provision pay a higher return because of the put option.