FINC 341 - EXAM 2 WITH COMPLETE
QUESTIONS AND VERIFIED ANSWERS {
GRADED A+}
Treasury Bonds - ✔✔issued by the federal gov, no default or liquidity risk, do
have maturity risk
Corporate bonds - ✔✔issued by corporations, have default risk, liquidity risk, and
maturity risk
Municipal bonds - ✔✔"munis," issued by state and local govs, have default risk
and liquidity risk, most are exempt from federal taxes so carry lower interest rates.
Foreign bonds - ✔✔issued by foreign govs or corporations, have default risk,
liquidity risk, maturity risk and exchange rate risk.
Par value - ✔✔stated face value of the bond ($1,000 for this class)
coupon interest rate - ✔✔designates coupon payment (i*par)
, floating rate bond (coupon interest rate) - ✔✔interest rate is tied to some rate such
as th4e Treasury bond rate
zero coupon bonds (coupon interest rate) - ✔✔pay no coupon pmts; offered at
substantial discount so have capital appreciation rather than interest income -->
taxed at a lower rate
Maturity - ✔✔any maturity is allowed; most range from 10 to 40 years
Call provision - ✔✔most corporate bonds have the right to call the bonds for
redemption by paying the par value plus a call premium (typically equal to one
year's interest if called in the first year, then declines by INT/N each year
thereafter); may have deferred call (call protection)
Sinking Fund Provision - ✔✔facilitates orderly retirement of the bonds - handled
two ways: 1) certain percentage of randomly chosen bonds retired each year, or 2)
certain amount bought on the open market - if i-rates have risen, causing bond
prices to fall, the firm will *buy* bonds in the open market at a discount; if i-rates
have fallen, it will *call* the bonds
Convertible bonds - ✔✔convertible into shares of common stock, at a fixed price,
at the option of the bondholder; lower coupon rate
QUESTIONS AND VERIFIED ANSWERS {
GRADED A+}
Treasury Bonds - ✔✔issued by the federal gov, no default or liquidity risk, do
have maturity risk
Corporate bonds - ✔✔issued by corporations, have default risk, liquidity risk, and
maturity risk
Municipal bonds - ✔✔"munis," issued by state and local govs, have default risk
and liquidity risk, most are exempt from federal taxes so carry lower interest rates.
Foreign bonds - ✔✔issued by foreign govs or corporations, have default risk,
liquidity risk, maturity risk and exchange rate risk.
Par value - ✔✔stated face value of the bond ($1,000 for this class)
coupon interest rate - ✔✔designates coupon payment (i*par)
, floating rate bond (coupon interest rate) - ✔✔interest rate is tied to some rate such
as th4e Treasury bond rate
zero coupon bonds (coupon interest rate) - ✔✔pay no coupon pmts; offered at
substantial discount so have capital appreciation rather than interest income -->
taxed at a lower rate
Maturity - ✔✔any maturity is allowed; most range from 10 to 40 years
Call provision - ✔✔most corporate bonds have the right to call the bonds for
redemption by paying the par value plus a call premium (typically equal to one
year's interest if called in the first year, then declines by INT/N each year
thereafter); may have deferred call (call protection)
Sinking Fund Provision - ✔✔facilitates orderly retirement of the bonds - handled
two ways: 1) certain percentage of randomly chosen bonds retired each year, or 2)
certain amount bought on the open market - if i-rates have risen, causing bond
prices to fall, the firm will *buy* bonds in the open market at a discount; if i-rates
have fallen, it will *call* the bonds
Convertible bonds - ✔✔convertible into shares of common stock, at a fixed price,
at the option of the bondholder; lower coupon rate
