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Multiple Choice

1
The bond rating of a security refers to:
A)The size of the coupon payment relative to the face value.
B)The return a holder is likely to receive.
C)The likelihood the lender/borrower will be repaid by the borrower/issuer.
D)The years until the bond matures.
2
The lowest rating for an investment grade bond assigned by Moody's is:
A)BBB
B)ABB
C)Baa
D)Aaa
3
Which of the following would probably not earn an A rating from Standard & Poor's:
A)A 30 year bond issued by the U.S. Treasury
B)A new vegetarian fast-food chain.
C)90 day T-Bills from the U.S. Treasury
D)a and c
E)none of the above.
4
The risk spread is:
A)The difference between a bond's purchase price and selling price.
B)Is usually positive for non U.S. Treasury bonds.
C)The difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity.
D)Is assigned by a bond rating agency.
E)b and c
5
The default premium:
A)Is positive for a U.S. Treasury bond.
B)Must always be less than 0 (zero).
C)Is also known as the risk spread.
D)Is assigned by a bond rating agency.
6
The risk structure of interest rates says:
A)The interest rates on a variety of bonds will move together.
B)U.S. Treasury bond yields always change by more than other bonds
C)Lower rated bonds will have higher yields.
D)a and c
E)b and c
7
The market for junk bonds increased after Michael Milkin's involvement because:
A)Milken convinced his employer to allow him to make a market in these securities.
B)He closed an outlet for investors willing to buy/sell these securities and monopolized the market.
C)He showed that these bonds had to be reserved only for fallen angels but could finance leveraged buyouts.
D)All of the above
8
Municipal bonds are:
A)Issued only by states.
B)Issued by states and cities and their interest is exempt from U.S. government taxation.
C)Issued by states and cities, but their interest is taxable only at the federal level.
D)Issued by the U.S. Treasury, but the proceeds can only be used by cities.
E)b and d
9
An investor earning 8% from a tax-exempt bond, who is in a 25% tax bracket, holding risk constant:
A)Would be indifferent to a taxable bond with a 10.67% yield.
B)Would be indifferent to a taxable bond with a 6.0% yield.
C)Would be indifferent to a taxable bond with a 6.25% yield.
D)None of the above.
10
In the fall of 1998 we saw an increase in the risk spread:
A)Because the risk spread always increases as we approach the end of the year.
B)There was an extraordinarily large amount of corporate fraud being reported in 1998.
C)The Russian government defaulted on some of its bonds.
D)There was a significant increase in U.S. income tax rates.
11
The Expectations Hypothesis does not suggest:
A)The yield curve should usually be downward sloping.
B)The slope of the yield curve depends on the expectations for future short term rates.
C)The slope of the yield curve reflects the risk premium associated with longer term bonds.
D)The yield curve should usually be upward sloping.
12
When the yield curve is downward sloping:
A)People could be expecting a tightening in monetary policy
B)Short term yields are lower than long term yields.
C)This is impossible, since the yield curve always slopes upward.
D)People are expecting an economic slowdown.
13
Inflation risk increases over time because:
A)The inflation rate always increases over time.
B)It is more difficult to forecast inflation over longer periods of time.
C)We always have inflation.
D)Investors are more focused on nominal returns than real returns.
14
Considering the Liquidity Premium Theory, if investors expect short term interest rates to decrease:
A)The yield curve must have a positive slope.
B)The yield curve must be inverted.
C)The yield curve could be flat.
D)The slope of the yield curve should actually increase.
15
The slope of the yield curve seems to predict the performance of the economy with:
A)Usually a 3 month lag.
B)Usually with a two year lag.
C)Usually within a few weeks.
D)Usually a one year lag.





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