Chapter 2 Practice Questions
1. Which of the following is not true of pre-refunded bonds?
A. They are typically AAA rated.
B. They are not defeased.
C. They no longer count as debt on the issuer’s balance sheet.
D. The funds that will be used to refund the bonds are held in escrow.
2. XYZ Corporation has four different types of bonds that it has issued. They are all callable bonds. Which bond will XYZ be most likely to call?
A. 5% bond callable at 102
B. 5% bond callable at par
C. 8% bond callable at 102
D. 8% bond callable at par
3. For a corporate bond with a par value of $1,000, how much is 60 basis points?
I. 0.6%
II. $6
III. $60
IV. 6%
A. I and II
B. I and III
C. II and III
D. II and IV
4. XYZ has a 5% convertible bond with a conversion price of $25. Its current share price is $45. What price would the bond have to be trading at to be trading at parity?
A. $1,000
B. $1,125
C. $1,800
D. $1,050
5. What is the practice of an issuer putting money regularly into an escrow account in order to redeem the bonds before maturity?
A. A sinking fund redemption
B. Advance refunding
C. Defeasement
D. A make-whole provision
6. What is the practice of new bonds being issued with the purpose of using the proceeds to pay off older bonds?
A. Refunding
B. Defeasement
C. A sinking fund redemption
D. A bond swap
7. Which of the following is not a secured bond?
A. Collateral trust bond
B. Equipment trust certificates
C. Mortgage bond
D. Debenture
8. Which two of the following statements are accurate about Moody’s and S&P’s credit rating scales?
I. Moody’s highest rating is AAA.
II. S&P’s highest rating is AAA.
III. Any bond with a grade lower than Baa on the Moody scale is considered a junk investment.
IV. A bond rated BBB on the S&P scale is less risky than a bond rated Baa on the Moody scale.
A. II and III
B. I and IV
C.