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Bond

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1. The idea that markets adjust rapidly enough to eliminate profit opportunities immediately is called________

a. perfect information.
b. market manipulation.
c. market efficiency.
d. market foolishness.
e. amateurs running the market.

2. Seeking to own stocks of different kinds in many markets is an example of
a. portfolio diversification.
b. portfolio rearrangement.
c. risk aversion.
d. risk neutrality.
e. investment confusion.

3. Suppose a stock has a price that gives it the same expected rate of return as a bank account, then

a. the price of the stock will rise and the expected rate of return will decrease.
b. the price of the stock will fall and the interest rate will decrease.
c. the price of the stock will rise and the expected rate of return will increase.
d. the price of the stock will fall and the expected rate of return will increase.
e. the price of the stock will fall and the expected rate of return will decrease.

4. On the maturity date, the firm or government that issued a bond must pay
a. the face value of the bond as well as the coupon.
b. the face value of the bond, the coupon, and a dividend.
c. the face value of the bond only.
d. the coupon only.
e. a dividend.

5. Which of the following is not an example of physical capital?
a. Drill press
b. Office furniture
c. Stapler
d. Money

6. Which of the following is an example of an equity contract?
a. Mortgage
b. Dividends
c. Stocks
d. Interest

7. Which of the following is not an example of financial capital?
a. IBM bonds
b. IBM stocks
c. Automatic teller machines
d. Government bonds
e. Corporate cash balances

8. Explain what happens to the price of a bond that pays a fixed percent of the face value every year when interest rates in the economy increase.

9. Suppose that a stock has a price that gives it the same expected rate of return as a bank account. Explain why this is not an equilibrium situation.

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Solution Preview

1. c. market efficiency.
2. a. portfolio diversification.
3. d. the price of the stock will fall and the expected rate of return will increase.
4. a. the face value of the bond as well as the coupon.
5. d. Money
6. c. Stocks
7 c. Automatic teller machines
8. The outcome depends on the original price of the ...

Solution Summary

The solution goes into a great amount of detail related to the several questions being asked. The solution is very easy to follow along and can be easily understood by anyone with a basic understanding of the concepts. The solution answers all the question(s) being asked in a succinct way. The solution does not give explanation for the multiple choice questions and only provides answers. However, the explanation provided for the two questions towards the end is very detailed and well written. Overall, an excellent response.

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See Also This Related BrainMass Solution

Bond Fundamentals

Bond Fundamentals
________________________________________
Question 1:
Explain the difference between calling a bond and bond refunding.
Question 2:
Identify the three most important determinants of the price of a bond. Describe the effect of each.
Question 3:
Given a change in the level of interest rates, discuss how two major factors will influence the relative change in price for individual bonds.
Question 4:
Briefly describe two indenture provisions that can affect the maturity of a bond.
Question 5:
Explain the differences in taxation of income from municipal bonds, from U.S. Treasury bonds, and from corporate bonds.
Question 6:
For several institutional participants in the bond market, explain what type of bond each is likely to purchase and why.
Question 7:
Why should investors be aware of the trading volume for bonds in their portfolio?
Question 8:
What is the purpose of bond ratings?
Question 9:
Based on the data in Exhibit 17.2 discuss the makeup of the Japanese bond market and how and why it differs from the U.S. market.
Exhibit 17.2:
2010 ( e )
Total Value Percent of Total
A. U.S. Dollars
Sovereign 5,309,688 34.5
Quasi & Foreign Govt. 1,939,190 12.6
Securitized/Collateralized 4,247,750 27.6
Corporate 2,801,053 18.2
High-Yield/Emerging Mkt. 1,108,109 7.1
Total 15,405,790 100.0

B. Euros
Sovereign 6,914,941 64.1
Quasi & Foreign Govt. 852,231 7.9
Securitized/Collateralized 1,326,892 12.3
Corporate 1,564,222 14.5
High-Yield/Emerging Mkt. 140,241 1.3
Total 10,798,527 100.0

C. Japanese Yen
Sovereign 4,659,743 81.4
Quasi & Foreign Govt. 429,337 7.5
Securitized/Collateralized 5,724 0.1
Corporate 635,420 11.1
High-Yield/Emerging Mkt. - 0.0
Total 5,730,224 100.0

D. Pound Sterling
Sovereign 792,517 50.2
Quasi & Foreign Govt. 202,076 12.8
Securitized/Collateralized 94,723 6.0
Corporate 472,037 29.9
High-Yield/Emerging Mkt. 17,366 1.1
Total 1,578,719 100.0

Question 10:
Discuss the positives and negatives of investing in a government agency issue rather than a straight Treasury bond.

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