1. Bonds are short-term debt instruments issued by government agencies or corporations.
False (Bonds are long-term debt instruments)(Lesson-5-Valdone)(Lesson-5-Madura). 2. The coupon rate of a bond is the annual interest payment as a percentage of its par value. True(Lesson-5-Valdone)(Lesson-5-Madura). 3. Callable bonds allow the issuer to redeem the bonds before maturity. True(Lesson-5-Valdone). 4. Bonds are issued only in the primary market. False (They are issued in the primary market but traded in the secondary market)(Lesson-5-Madura). 5. A bond's par value is always the same as its market price. False (Market price fluctuates based on interest rates and other factors)(Lesson-5-Valdone).
Bond Yields and Valuation
6. Yield to maturity (YTM) includes both coupon payments and capital gains/losses. True(Lesson-5-Valdone)(Lesson-5-Gitman). 7. Bond prices and interest rates have a direct relationship. False (They have an inverse relationship)(Lesson-5-Valdone)(Lesson-5-Gitman). 8. Clean price refers to the price of a bond excluding any accrued interest. True(Lesson-5-Valdone). 9. Bonds with higher credit risk tend to have lower yields. False (Higher credit risk leads to higher yields)(Lesson-5-Valdone). 10. Redemption yield is the return an investor earns if they hold the bond until maturity. True(Lesson-5-Valdone).
Types of Bonds 11. Floating rate notes adjust their coupon payments based on benchmark interest rates. True(Lesson-5-Valdone). 12. Eurobonds are bonds issued in a currency different from the country where they are sold. True(Lesson-5-Valdone). 13. Junk bonds are high-risk bonds with higher yields compared to investment-grade bonds. True(Lesson-5-Valdone)(Lesson-5-Madura). 14. Index-linked bonds adjust their coupon payments based on inflation rates. True(Lesson-5-Valdone). 15. Convertible bonds can be converted into shares of the issuing company. True(Lesson-5-Valdone). Bond Markets 16. Liquidity in the bond market refers to how easily bonds can be bought or sold at stable prices. True(Lesson-5-Valdone)(Lesson-5-Madura). 17. Government bonds are less liquid than corporate bonds. False (Government bonds are typically more liquid)(Lesson-5-Valdone)(Lesson-5-Madura). 18. The bond market is segmented into government and non-government sectors. True(Lesson-5-Valdone). 19. Euro-denominated bonds issued outside the Eurozone are called "Euro Eurobonds." True(Lesson-5-Valdone). 20. Treasury securities are considered free of default risk. True(Lesson-5-Madura)(Lesson-5-Gitman).
Interest Rates and Risks
21. The nominal interest rate includes both the real interest rate and the expected inflation premium. True(Lesson-5-Gitman). 22. Credit risk is the likelihood that a bond issuer will default on their obligations. True(Lesson-5-Valdone). 23. A risk-free rate is free of inflation and default risks. False (It includes an inflation premium but is free of default risk)(Lesson-5-Gitman). 24. Liquidity preference theory suggests that investors prefer long-term bonds over short-term ones. False (Investors generally prefer short-term bonds for liquidity)(Lesson-5-Gitman). 25. Yield curves typically slope upward because of inflation expectations. True(Lesson-5-Gitman).
Advanced Topics 26. STRIPS (Separate Trading of Registered Interest and Principal Securities) are zero-coupon bonds derived from standard bonds. True(Lesson-5-Madura). 27. Inflation-indexed bonds like TIPS adjust their par value according to inflation rates. True(Lesson-5-Madura)(Lesson-5-Gitman). 28. High interest rate volatility increases the attractiveness of floating-rate bonds. True(Lesson-5-Valdone)(Lesson-5-Gitman). 29. Market segmentation theory posits that interest rates are determined solely by demand and supply within specific maturity segments. True(Lesson-5-Gitman). 30. Bonds with call provisions are more favorable to investors compared to issuers. False (They are more favorable to issuers)(Lesson-5-Valdone).
1. A bond’s par value represents the amount the issuer agrees to repay at maturity. True(Lesson-5-Valdone)(Lesson-5-Madura). 2. Callable bonds are less favorable to investors because they might be redeemed early. True(Lesson-5-Valdone). 3. The market price of a bond equals its par value when its coupon rate is higher than the market interest rate. False (Market price is higher when the coupon rate exceeds the market interest rate)(Lesson-5-Valdone). 4. Convertible bonds typically allow bondholders to convert the bond into a fixed number of shares. True(Lesson-5-Valdone). 5. The primary market for bonds is where investors trade existing bonds. False (This describes the secondary market)(Lesson-5-Madura). 6. Investors in inflation-indexed bonds are protected against rising prices. True(Lesson-5-Madura)(Lesson-5-Gitman). 7. Bonds with lower credit ratings usually offer lower yields to investors. False (They offer higher yields to compensate for increased risk)(Lesson-5-Valdone)(Lesson-5-Madura). 8. Floating-rate notes (FRNs) adjust their interest payments periodically to align with market rates. True(Lesson-5-Valdone). 9. A downward-sloping yield curve often indicates that investors expect interest rates to rise. False (It suggests expectations of declining rates)(Lesson-5-Gitman). 10. STRIPS are bonds issued directly by governments to investors. False (They are created by financial institutions from standard government bonds)(Lesson-5-Madura). 11. Bond prices increase when market interest rates decrease. True(Lesson-5-Valdone)(Lesson-5-Gitman). 12. Eurobonds are always issued in euros. False (They are issued in a foreign currency relative to the issuer’s country)(Lesson-5-Valdone). 13. Investors face default risk when holding Treasury securities. False (Treasury securities are considered default-free)(Lesson-5-Madura)(Lesson-5-Gitman). 14. A bond’s clean price includes accrued interest. False (The clean price excludes accrued interest; the dirty price includes it)(Lesson-5-Valdone). 15. The liquidity premium compensates investors for the risk of holding less liquid bonds. True(Lesson-5-Valdone)(Lesson-5-Madura). 16. Bonds issued by municipalities may be exempt from federal taxes. True(Lesson-5-Madura). 17. Yield to maturity (YTM) assumes that all coupon payments are reinvested at the bond’s current yield. True(Lesson-5-Valdone)(Lesson-5-Madura). 18. A bondholder’s redemption yield always matches their holding period return. False (Holding period return depends on the bond's selling price, which may differ)(Lesson-5-Madura). 19. Treasury Inflation-Protected Securities (TIPS) adjust their coupon payments based on the consumer price index (CPI). True(Lesson-5-Madura). 20. Market segmentation theory assumes that markets for short-term and long-term debt are independent. True(Lesson-5-Gitman). 21. The risk premium on a bond reflects its default and liquidity risks. True(Lesson-5-Gitman). 22. Callable bonds are typically issued at a lower yield than non-callable bonds. False (They generally have higher yields to compensate for call risk)(Lesson-5-Valdone). 23. Investors in zero-coupon bonds receive periodic interest payments. False (They receive the full amount at maturity)(Lesson-5-Valdone). 24. Credit ratings provided by agencies like Moody’s or S&P directly affect a bond’s yield. True(Lesson-5-Valdone)(Lesson-5-Madura). 25. The term structure of interest rates is shown through a graph called the yield curve. True(Lesson-5-Gitman). 26. Junk bonds have a lower likelihood of default compared to investment-grade bonds. False (They have a higher likelihood of default)(Lesson-5-Valdone)(Lesson-5-Madura). 27. Accrued interest is added to the bond’s price when it is traded in the market. True(Lesson-5-Valdone). 28. Treasury bond auctions allow both competitive and noncompetitive bidding. True(Lesson-5-Madura). 29. Investors generally demand higher returns for bonds with longer maturities. True(Lesson-5-Gitman). 30. Floating-rate notes are riskier than fixed-rate bonds during times of high inflation. False (They adjust to inflation, reducing risk)(Lesson-5-Valdone)(Lesson-5-Gitman).
