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Questions and Answers
What type of entity issues Treasury notes or bonds?
What type of entity issues Treasury notes or bonds?
- State governments
- US government (correct)
- Corporate entities
- Local governments
Which type of bond is issued by state or local governments?
Which type of bond is issued by state or local governments?
- Floating rate bonds
- Debentures
- Municipal bonds (correct)
- Income bonds
What feature of a bond contract refers to the provision that allows the issuer to repurchase the bond before maturity?
What feature of a bond contract refers to the provision that allows the issuer to repurchase the bond before maturity?
- Call provision (correct)
- Trustee
- Restrictive covenant
- Sinking fund
Convertible, subordinated debenture, and junk are types of which bonds?
Convertible, subordinated debenture, and junk are types of which bonds?
Which feature of a bond contract gives bondholders the right to convert their bonds into shares of common stock?
Which feature of a bond contract gives bondholders the right to convert their bonds into shares of common stock?
What is a common method used for redeeming bonds through a repurchase on the open market?
What is a common method used for redeeming bonds through a repurchase on the open market?
What are the two prominent credit rating agencies mentioned in the text?
What are the two prominent credit rating agencies mentioned in the text?
Which type of bonds are considered investment grade according to the text?
Which type of bonds are considered investment grade according to the text?
What does a 'narrow spread' indicate in the context of bond yields?
What does a 'narrow spread' indicate in the context of bond yields?
In the bond market, what is the significance of changes in bond ratings according to the text?
In the bond market, what is the significance of changes in bond ratings according to the text?
Which bond type generally offers higher yields based on the provided data?
Which bond type generally offers higher yields based on the provided data?
Which of the following is NOT a feature of a bond contract?
Which of the following is NOT a feature of a bond contract?
What is the primary purpose of bond ratings?
What is the primary purpose of bond ratings?
Which of the following is a characteristic of corporate bonds?
Which of the following is a characteristic of corporate bonds?
What is the primary difference between short-term and long-term debt?
What is the primary difference between short-term and long-term debt?
Which of the following is a type of government bond?
Which of the following is a type of government bond?
What is the primary factor that determines a bond's rating?
What is the primary factor that determines a bond's rating?
Study Notes
Types of Financial Institutions
- There are many different types of financial institutions due to different investor risk/return tradeoff preferences and firms' ability to raise funds more easily by offering desired securities.
Debt
- Debt is a loan.
- Two main classifications of debt are short-term and long-term.
Bond Ratings
- Bond ratings are based on quantitative and qualitative factors.
- Ratings indicate the default risk associated with a bond.
- Examples of bond rating agencies include Moody's Investors Service (Moody's) and Standard & Poor's Corporation (S&P).
- Investment grade bonds have a rating of Triple B or better.
Types of Bonds
- Government bonds include:
- Treasury notes or bonds (issued by US government)
- Municipal bonds (issued by state or local governments)
- Revenue bonds
- General obligation bonds
- Corporate bonds include:
- Mortgage bonds
- Debenture
- Subordinated debenture
- Income bond
- Putable bond
- Indexed (purchasing power) bond
- Floating rate bond
- Zero coupon bond
- Junk bond
Bond Contract Features
- Bond Indenture: a contract between the issuer and the bondholder
- Trustee: a third party that oversees the bond issue
- Restrictive covenant: a provision that restricts the issuer's actions
- Call provision: a provision that allows the issuer to redeem the bond
- Sinking fund: a provision that requires the issuer to set aside funds for bond repayment
Yields on Long-Term Bonds
- Yields on U.S. government bonds are based on bonds with 10-year maturities.
- Between 1990 and 2010, the yields on corporate bonds (AAA and BBB) and U.S. government bonds varied, with a wide spread in yields during certain periods.
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Description
Test your knowledge on bond ratings, including Moody's and S&P ratings, investment grade bonds, criteria for rating bonds, and the importance of bond ratings. This quiz is based on Principles of Finance 5e, Chapter 2 on Financial Assets.
