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1 | |
Recent research has identified all of the following factors but one as significantly influencing risk premiums on corporate bonds. Which factor below is not mentioned in the text as influencing bond risk premiums? |
| | A) | Corporate liquidity positions |
| | B) | Stage of the business cycle. |
| | C) | Variability in company earnings. |
| | D) | Period of time a firm has been in operation. |
| | E) | Amount of leverage employed |
| | F) | All of the above are mentioned in the text as influencing bond risk premiums. |
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2 | |
An individual investor has held a share of common stock for 7 months, but decides to sell it today. The original purchase price was $120 and today's selling price is $150. This investor is in the 28 percent marginal income tax bracket. How much of the stock's capital gain will be left over after federal taxes? |
| | A) | $8.40 |
| | B) | $10.20 |
| | C) | $21.60 |
| | D) | $19.80 |
| | E) | none of the above |
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3 | |
The difference between the promised yield and the expected yield is the: |
| | A) | anticipated loss due to default. |
| | B) | anticipated inflation rate. |
| | C) | actual inflation rate. |
| | D) | liquidity risk premium |
| | E) | none of the above |
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4 | |
Securities that repay both interest and loan principal during their life are known as: |
| | A) | loan-backed securities |
| | B) | adjustable-rate loans |
| | C) | variable-rate securities |
| | D) | balloon-payment loans |
| | E) | none of the above |
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5 | |
The risk faced by investors in loan-backed securities that some of the loans backing these securities will be paid off early is known as: |
| | A) | option risk |
| | B) | prepayment risk |
| | C) | event risk |
| | D) | loan hypothecation |
| | E) | none of the above |
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6 | |
The investment banking firm that pioneered new techniques to sell junk bonds and was instrumental in the rapid growth of the junk-bond market was: |
| | A) | Drexel Burnham Lambert, Inc. |
| | B) | Goldman Sachs, Inc. |
| | C) | First Boston Corporation. |
| | D) | Salomon Brothers, Inc. |
| | E) | none of the above |
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7 | |
A government subsidy to induce investors to support local government by financing the construction of schools, highways, and other needed public projects is: |
| | A) | favorable tax treatment of capital gains. |
| | B) | tax-exempt municipal securities. |
| | C) | favorable tax treatment of capital losses. |
| | D) | personal tax exemptions for individual taxpayers. |
| | E) | none of the above |
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8 | |
The failures of Argentina and Enron Corporation in 2001 reflect |
| | A) | interest rate risk |
| | B) | currency risk |
| | C) | political risk |
| | D) | inflation risk |
| | E) | default risk |
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9 | |
The Orange County, California case is a clear example of what kind of risk in the financial markets? |
| | A) | default risk |
| | B) | inflation risk |
| | C) | event risk |
| | D) | call risk |
| | E) | none of the above |
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10 | |
A U.S. government bond carries a before-tax yield to maturity of 15 percent. It is purchased by a commercial bank, which plans to hold the bond until it matures. The bank's marginal tax rate (i.e., tax bracket) is 30 percent. What is the bond's after-tax yield to the bank (to the nearest tenth of a percent)? |
| | A) | 10.5 percent |
| | B) | 4.5 percent |
| | C) | 3 percent |
| | D) | 12 percent |
| | E) | none of the above |
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11 | |
Finance theory suggests that yield curves on higher-risk (speculative) corporate bonds tend to have a downward (negative) slope or are humped or bowed in shape. Why this might be true is that: |
| | A) | most speculative bonds pay floating rates of interest |
| | B) | most are issued when short-term rates are high |
| | C) | these bonds are the most speculative when newly issued and appear to improve in quality as they are seasoned |
| | D) | all of the above |
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12 | |
Further purchases of junk bonds by thrift institutions were outlawed by passage of the |
| | A) | Glass-Steagall Act. |
| | B) | Depository Institutions Deregulation Act. |
| | C) | Financial Institutions Reform, Recovery, and Enforcement Act. |
| | D) | Competitive Equality Banking Act. |
| | E) | none of the above |
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13 | |
The feature of a bond contract that some researchers refer to as a "zero sum game" is known as the |
| | A) | promised coupon rate |
| | B) | liquidity premium |
| | C) | call privilege |
| | D) | term agreement |
| | E) | none of the above |
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14 | |
Announcements from a security-issuing institution that affect the market value of the issuer's securities are an example of _____ risk. |
| | A) | prepayment |
| | B) | call |
| | C) | default |
| | D) | event |
| | E) | none of the above |
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15 | |
A rise in the marginal tax rate will make high coupon _____ more attractive relative to high coupon ____? |
| | A) | municipal bonds, corporate bonds |
| | B) | U.S. Treasury bonds, municipal bonds |
| | C) | corporate bonds, U.S. Treasury bonds |
| | D) | corporate bonds, municipal bonds |
| | E) | domestic bonds, foreign bonds. |
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16 | |
Which of the following financial contracts may help to protect an investor from the risks of rising borrowing costs or a decline in the value of the risky assets in his/her investment portfolio? |
| | A) | credit option |
| | B) | total return swap |
| | C) | credit swap |
| | D) | all of the above |
| | E) | none of the above |
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17 | |
If interest rates are expected to fall, the spread between corporate and U.S. government bond rates tends to widen due to: |
| | A) | liquidity risk |
| | B) | call risk |
| | C) | default risk |
| | D) | inflation risk |
| | E) | exchange risk |
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18 | |
The price at which the yield on a convertible bond matches the yield on nonconvertible bonds of the same quality and credit rating is known as the convertible bond's |
| | A) | investment premium. |
| | B) | conversion premium. |
| | C) | conversion value. |
| | D) | conversion price. |
| | E) | investment value. |
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19 | |
A liquid financial asset: |
| | A) | is readily marketable |
| | B) | possesses a price which tends to be stable over time |
| | C) | can be sold with little risk of loss |
| | D) | all of the above |
| | E) | choices a and c only |
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20 | |
A corporate bond carries a promised yield of 14 percent and an expected yield of 11 percent. The bond's anticipated loss (to the nearest whole percentage point) is: |
| | A) | 25 percent |
| | B) | 12 percent |
| | C) | 6 percent |
| | D) | 4 percent |
| | E) | 3 percent |
| | F) | none of the above |
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