Chapter 16 Personal Finance

Bonds are equity investments issued by corporations or government agencies. (T/F) False
A bond’s par value or face value is the amount the investor will get paid when the bondmatures. (T/F) True
Generally, bonds have maturities between 10 and 30 years and pay interest annually (T/F) False
If you want to receive periodic income from your investments, you should consider investing in bonds rather than stocks. (T/F) True
A call feature on bonds allows the issuer to buy back the bonds from investors before thematurity date. (T/F) True
Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature. (T/F) True
Bonds are issued with a callable feature when the issuers expect interest rates to rise (T/F) False
A convertible bond allows the investor to exchange that bond for another issue of bondswithin the convertible period. (T/F) False
A bond’s yield to maturity is the annualized percentage return of both interest and capitalgains or losses if the bond were held until it matured. (T/F) True
Because convertibility is a desirable feature for investors, convertible bonds tend to offer a higher return than nonconvertible bonds. (T/F) False
When a bond has a par or face value of $1,000 and a 6% coupon rate, the semiannualpayment would be $60. (T/F) False
During their lifetime, bonds can be sold for more or less than their face value depending on the demand for these particular bonds. (T/F) True
An advantage to owning bonds is that investors can sell them to other investors in theprimary market before the bonds reach maturity. (T/F) False
The ________ is the amount returned to the investor at the maturity date when the bond is due.A) principalB) interest gainC) capital gainD) terminal value A) principal
Which of the following is not always a true statement?A) The par value of a bond is its face value.B) The par value of a bond is its market value.C) The par value of a bond will be paid to the bondholder at maturity.D) The par value multiplied by the coupon rate equals the interest paid to investors annually B) The par value of a bond is its market value.
Bonds usually pay interestA) annually.B) semiannually.C) quarterly.D) monthly. B) semiannually.
Investors purchase corporate bonds becauseA) they are a risk-free investment.B) they pay interest income.C) they pay dividends.D) the returns are higher than the returns from stocks. B) they pay interest income.
All of the following may be a feature of a bond, exceptA) convertible.B) dividends.C) tax-free.D) callable. B) dividends.
Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?A) Par valueB) Call featureC) ConvertibilityD) Yield to maturity C) Convertibility
If a company anticipates a substantial decline in interest rates in the future, which of the following is it likely to include in a bond?A) Par valueB) Call featureC) ConvertibilityD) Reverse dividend B) Call feature
If a bond’s price is lower than the principal amount, its yield to maturity will be ________ the coupon rate.A) less thanB) more thanC) equal toD) no relation to B) more than
The return on bonds currently held will be more favorable if interest rates ________ over the period you hold the bonds.A) increaseB) decreaseC) fluctuateD) remain the same B) decrease
The coupon rate of interest on a bond is always stated as a(n)A) daily rate.B) monthly rate.C) semiannual rate.D) annual rate. D) annual rate.
The ________ is the stated interest rate of the bond at the time it was issued.A) effective rateB) yieldC) coupon rateD) IRR C) coupon rate
If a bond’s value rises above its face value during its life, interest rates haveA) increased.B) decreased.C) stayed the same.D) there is no relationship between bond prices and interest rates. B) decreased.
The interest received from U.S. Treasury bonds is exempt from federal, state, and localincome taxes. (T/F) False
Since municipal bond interest is exempt from federal income tax, it is especially beneficial to high-income investors. (T/F) True
Municipal bonds are those issued by the U.S. Treasury Department for the benefit of cities and states. (T/F) False
Junk bonds offer a relatively high rate of return, but they are more likely to default than other bonds. (T/F) True
________ bonds are the least risky of all bonds and, therefore, pay a lower rate of interest.A) TreasuryB) MunicipalC) Federal agencyD) Corporate A) Treasury
Municipal bonds are most beneficial for investors whoA) reside in a different state from the municipality that issued the bonds.B) are in a low tax bracket.C) are in a high tax bracket.D) qualify for the earned income credit. C) are in a high tax bracket.
Which of the following statements is not true regarding municipal bonds?A) They are issued by state and local governments.B) They are free from the risk of default.C) The interest is exempt from federal income taxes.D) The interest is exempt from state taxes if the investor resides in the state where the bond was issued. B) They are free from the risk of default.
Federal agency bonds are all of the following exceptA) issued by government agencies or government-sponsored entities.B) have a very low degree of default risk.C) issued by Ginnie Mae, Freddie Mac, and Fannie Mae.D) exempt from all taxation. D) exempt from all taxation.
Which of the following is a characteristic of corporate bonds?A) Rated on a scale from AAAA to FFFFB) Used to finance debt over a short period such as six monthsC) Issued as long-term debt securitiesD) Exempt from state tax in the state where the issuing company has its headquarters C) Issued as long-term debt securities
Another name for high-yield bonds isA) corporate bonds.B) federal agency bonds.C) T-bills.D) junk bonds. D) junk bonds.
The relationship between a bond’s price and the yield to maturityA) changes at a rate equal to the change in yield.B) is linear.C) is inverse.D) is relative. C) is inverse.
The present value of a bond can be computed by discounting the ________ to be receivedfrom the bond.A) capital gainsB) required rate of returnC) tax benefitsD) future cash flows (coupon and principal payments) D) future cash flows (coupon and principal payments)
The risk premium of bonds is the amount by which their annualized yield exceeds theTreasury bond yield. (T/F) True
If you expect interest rates to rise over time, you should consider investing in bonds withlonger maturities. (T/F) false
As interest rates go up, bond pricesA) also go up.B) go down.C) remain the same.D) may go up or down B) go down.
________ bonds do not contain a risk premium because they are free from default risk.A) TreasuryB) MunicipalC) CorporateD) City A) Treasury
Bonds with ________ terms to maturity are ________ sensitive to interest rate movements than bonds that have short terms remaining until maturity.A) middle; lessB) longer; lessC) longer; moreD) longer; equally C) longer; more
A passive strategy of bond investing consists of buying bonds for the long-term and not selling them until maturity. (T/F) True
The maturity matching strategy involves selecting bonds that will generate payments to match future expenses. (T/F) True
Interest Strategy selecting bonds for investment based on interest rate expectations.

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