Fixed income Lv1

Which of the following is an advantage of a callable bond (compared to an identical option-free bond) to an investor?

• Less reinvestment risk.

• Higher yield.

• More convexity.

Which of the following is a disadvantage to bondholders if a bond has a sinking fund provision?

• Lower credit quality.

• Unfavorable tax status.

• Greater reinvestment risk.

coupon = 12% − (3.0 × 6-month Treasury bill rate)This bond is most accurately described as:

• a step-up note.

• an inverse floater.

• an inflation protected security.

An investor most concerned with reinvestment risk would be least likely to:

• prefer a noncallable bond to a callable bond.

• prefer a lower coupon bond to a higher coupon bond.

• eliminate reinvestment risk by holding a coupon bond until maturity.

A dual-currency bond pays coupon interest in a currency:

• of the bondholder’s choice.

• other than the home currency of the issuer

• other than the currency in which it repays principal

A clause in a bond indenture that requires the borrower to perform a certain action is most accurately described as

• an affirmative covenant

• a trust deed.

• a negative covenant

A 10-year bond pays no interest for three years, then pays $229.25, followed by payments of $35 semiannually for seven years, and an additional $1,000 at maturity. This bond is:

• a step-up bond

• a zero-coupon bond.

• a deferred-coupon bond.

Which of the following statements is most accurate with regard to floating-rate issues that have caps and floors?

• A cap is an advantage to the bondholder, while a floor is an advantage to the issuer.

• A floor is an advantage to the bondholder, while a cap is an advantage to the issuer

• A floor is an advantage to both the issuer and the bondholder, while a cap is a disadvantage to both the issuer and the bondholder

Which of the following most accurately describes the maximum price for a currently callable bond?

• Its par value

• The call price

• The present value of its par value.

An investor buys a pure-discount bond, holds it to maturity, and receives its par value. For tax purposes, the increase in the bond’s value is most likely to be treated as:

• a capital gain

• interest income.

• tax-exempt income