Basics of Financial Markets (Week 8)

How was your fall break?

Which of the following best defines a callable bond?

• A bond that can be retired by the issuer before its maturity date

• A bond that can be retired by the bondholder before its maturity date

• A bond that can be converted into stock

• A bond that has no maturity date

What are samurai bonds?

• Yen denominated

  bonds sold outside of Japan.

• Yen denominated

  bonds sold in Japan by non-Japanese issuers.

• Yen denominated

  bonds sold in Japan by Japanese corporations.

• Yen denominated

  bonds issued by the Japanese government.

The YTM of a premium bond is ALWAYS less than the coupon rate

• True

• False

The current yield is greater than the yield to maturity when...

• The bond is selling at a premium.
• The bond is selling at par.
• The bond has a higher coupon rate than the market rate.

• The bond is selling at a discount.

Junk bonds are...

• zero-coupon bonds

• government bonds with fixed interest rates
• low-risk investments with guaranteed returns
• high-yield bonds with a higher risk of default

Treasury strips...

• Treasury strips are zero-coupon bonds sold at a discount.
• Treasury strips pay interest annually.

Credit Default Swaps

• Credit Default Swaps are used to increase credit risk.
• Credit Default Swaps are a type of insurance policy for real estate.
• Credit Default Swaps are only available to government entities.
• Credit Default Swaps are financial instruments used to manage credit risk.

A credit default swap (CDS) is, in effect, an insurance policy on the default risk of a

bond or loan.

• True

• False

________-____ bonds pay a coupon rate at a fixed premium over a reference short-term interest

rate. Risk is limited because the rate is tied to current market conditions.

(a)