Bond Ratings and Criteria Quiz

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Questions and Answers

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?

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?

Call provision (correct)

Trustee

Restrictive covenant

Sinking fund

Convertible, subordinated debenture, and junk are types of which bonds?

Debentures Signup and view all the answers

Which feature of a bond contract gives bondholders the right to convert their bonds into shares of common stock?

Convertible Signup and view all the answers

What is a common method used for redeeming bonds through a repurchase on the open market?

Buy bonds on the open market Signup and view all the answers

What are the two prominent credit rating agencies mentioned in the text?

Moody's and Standard & Poor's Signup and view all the answers

Which type of bonds are considered investment grade according to the text?

Triple B or better bonds Signup and view all the answers

What does a 'narrow spread' indicate in the context of bond yields?

Lower risk for investors Signup and view all the answers

In the bond market, what is the significance of changes in bond ratings according to the text?

Changes in bond ratings can impact investor confidence and bond prices Signup and view all the answers

Which bond type generally offers higher yields based on the provided data?

U.S. government bonds Signup and view all the answers

Which of the following is NOT a feature of a bond contract?

Share price Signup and view all the answers

What is the primary purpose of bond ratings?

To provide an assessment of the bond's default risk Signup and view all the answers

Which of the following is a characteristic of corporate bonds?

They typically have higher default risk than government bonds Signup and view all the answers

What is the primary difference between short-term and long-term debt?

Short-term debt has a maturity of one year or less, while long-term debt has a maturity greater than one year Signup and view all the answers

Which of the following is a type of government bond?

Municipal bond Signup and view all the answers

What is the primary factor that determines a bond's rating?

The issuer's ability to make scheduled interest and principal payments Signup and view all the answers

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.