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Fixed-Income Securities Overview

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Questions and Answers

What is the purpose of the coupon payments made by the borrower to the bondholder?

To compensate the bondholder for the time value of money
To cover the administrative costs of the bond issuance
To provide the bondholder with a regular fixed income (correct)
To pay back the principal or par value of the bond

What is the relationship between the par value of a bond and the coupon rate?

The coupon rate determines the par value
The par value determines the coupon rate (correct)
The par value is equal to the coupon rate multiplied by the term of the bond
The par value and coupon rate are independent of each other

How is the semi-annual coupon payment calculated?

By multiplying the par value of the bond by the annual coupon rate and dividing by 2 (correct)
By adding the par value of the bond to the annual coupon rate and then dividing by 2
By multiplying the par value of the bond by the annual coupon rate and dividing by 4
By dividing the par value of the bond by the annual coupon rate and then dividing by 2

What happens to the bondholder when the bond matures?

The bondholder receives the final coupon payment and the par value of the bond (B) Signup and view all the answers

What is the significance of the bond trading at a price of 100?

The bond is trading at its face value or par (B) Signup and view all the answers

What is the most common bond denomination?

$1,000 (A) Signup and view all the answers

What is the primary purpose of fixed-income securities?

To facilitate lending between investors and borrowers (D) Signup and view all the answers

Which of the following is NOT a common type of fixed-income security mentioned in the text?

Preferred stocks (B) Signup and view all the answers

What is the term used for the regular payments made from the issuer to the holder of a fixed-income security?

Coupons (A) Signup and view all the answers

What is one reason why corporations may issue fixed-income securities, according to the text?

To finance their operations and growth plans (A) Signup and view all the answers

What is the term used for the amount that the issuer of a fixed-income security promises to repay at maturity?

All of the above (D) Signup and view all the answers

Why might a corporation choose to borrow money through fixed-income securities?

To take advantage of leverage if they can earn a higher return than the cost of borrowing (A) Signup and view all the answers

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