Interest Rates and Bond Valuation: Answer Key for Multiple Choice Questions

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  • Topic: Bond, Bonds, Yield curve
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  • Published : December 9, 2012
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Multiple Choice Questions

1. The stated interest payment, in dollars, made on a bond each period is called the bond's: A. coupon.
2. The principal amount of a bond that is repaid at the end of the term is called the: B. face value.
3. The specified date on which the principal amount of a bond is repaid is called the: C. maturity.
4. The rate of return required by investors in the market for owning a bond is called the: D. yield to maturity.
5. The annual coupon divided by the face value of a bond is called the: E. coupon rate.
6. The annual coupon payment divided by the market price of a bond is called the: B. current yield.
7. An indenture is:
E. the written agreement between the bond issuer and the bondholders which details the terms of the debt issue. 8. A bond for which the registrar of the issuer records ownership and for which payments are made directly to the owner of record is said to be in: B. registered form.

9. A bond which is issued without recording of the owner's name and for which payments are made to whomever has physical possession of the bond is said to be in: C. bearer form.
10. An unsecured debt of a firm with a maturity of 10 years or more is called a(n): E. debenture.
11. An unsecured debt of a firm with a maturity of less than 10 years is called a(n): D. note.
12. An account managed by a bond trustee for early bond redemption payments is called a: A. sinking fund.
13. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision. B. call
14. The amount by which the call price exceeds the bond's par value is the: C. call premium.
15. A deferred call provision refers to the:
D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date. 16. A bond which currently cannot be called but is eligible for a call at a later date is referred to as a: B. call-protected bond.

17. Parts of the indenture limiting certain actions that might be taken during the term of the loan to protect the interests of the lender are called: E. protective covenants.
18. A bond that makes no coupon payments and is initially sold at a deep discount is called a _____ bond. E. zero coupon
19. The price a dealer is willing to pay for a security is called the: C. bid price.

20. The price at which a dealer is willing to sell a security is called the: D. asked price.
21. The difference between the price which a dealer is willing to pay and the price at which the dealer is willing to sell is called the: E. bid-ask spread.
22. The quoted price of a bond is referred to as the _____ price. C. clean
23. The price a buyer actually pays to purchase a bond is called the _____ price. D. dirty
24. A real rate is a nominal rate which has been adjusted for: A. inflation.
25. Interest rates that have not been adjusted for inflation are called _____ rates. E. nominal
26. The relationship between nominal rates, real rates, and inflation is known as the: B. Fisher effect.
27. The pure time value of money is known as the: .
C. term structure of interest rates.
28. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation. D. inflation
29. The interest rate risk premium is the:
B. compensation investors demand for accepting interest rate risk. 30. A Treasury yield curve is defined as the plotting of the yields on Treasury securities relative to: E. maturity.
31. The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer. A. default risk
32. The taxability premium compensates investors when a bond: D. has an unfavorable tax status.
33. The liquidity premium is compensation to investors for: B. the lack of an active market wherein a bond can be sold for its actual value. 34. Which...
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