THE BREAK-EVEN TAX RATE BETWEEN A TAXABLE CORPORATE BOND YIELDING 6.5 PERCENT AND A COMPARABLE NONTAXABLE MUNICIPAL BOND YIELDING 4 PERCENT CAN BE EXPRESSED

04 Jun THE BREAK-EVEN TAX RATE BETWEEN A TAXABLE CORPORATE BOND YIELDING 6.5 PERCENT AND A COMPARABLE NONTAXABLE MUNICIPAL BOND YIELDING 4 PERCENT CAN BE EXPRESSED

55.
Which one of the following statements concerning bond ratings is correct?

a. Standard
and Poor’s and Value Line are the primary bond rating agencies.

b. Bond
ratings assess the default risk and volatility of a bond.

C. A crossover
bond is rated differently by various rating agencies.

d.Bond
ratings evaluate the expected price volatility of a bond issue.

e. A
“fallen angel” is a split rated bond.

56.
A “fallen angel” is a bond that:

a. lowered
its annual interest payment.

b. has
moved from being a long-term obligation to being a short-term obligation.

c. has
moved from having a yield to maturity in excess of the coupon rate to having a
yield to maturity that is less than the coupon rate.

D. has
moved from being an investment-grade bond to being a junk bond.

e. is
rated as Baa by one rating agency and rated as BBB by another rating agency.

57.
Bonds issued by the U.S. government:A. are
considered to be free of default risk.

b. are
considered to be free of interest rate risk.

c. provide
totally tax-free income.

d.pay
interest that is exempt from federal income taxes.

e. are
zero-coupon bonds.

7-19

Chapter
007 Interest Rates and Bond Valuation

58.
Treasury bonds are:

a. issued
by any governmental agency in the U.S.

b. issued
only on the first day of each fiscal year by the U.S. Department of Treasury.

c. offer
the best tax benefits of any bonds currently available.

D. generally issued as
semi-annual coupon bonds.e. totally risk-free.

59.
Municipal bonds:

a. have
no risk of default.

b. generally
pay a higher rate of return than corporate bonds.

c. are
those bonds issued only by local municipalities, such as a city or a borough.D. are generally callable.

e. pay
interest that is automatically tax-free at all levels.

60. The break-even tax rate between a
taxable corporate bond yielding 6.5 percent and a comparable nontaxable
municipal bond yielding 4 percent can be expressed as:

a.
.065.jpg”> (1.jpg”> t*)
= .04.

b. .04.jpg”> (1.jpg”> t*) = .065. c. .065 + (1
.jpg”> t*) = .04.

D.
.065.jpg”> (1.jpg”> t*) = .04. e. .04.jpg”> (1.jpg”> t*) = .065.

7-20

Chapter
007 Interest Rates and Bond Valuation

61. A
zero coupon bond:

a.
is sold at a large premium.

B. provides a deductible interest expense
to the issuer on an annual basis.

c. can
only be issued by the U.S. Treasury.

d.has
less interest rate risk than a comparable coupon bond.

e. provides
no taxable income to the bondholder until the bond matures.

62.
The total interest paid on a zero-coupon bond is equal to: a. zero.

B. the face value minus the issue price.

c. the
face value minus the market price on the maturity date.

d.$1,000
minus the face value.

e. $1,000
minus the par value.

63.
The collar of a floating-rate bond refers to the minimum and maximum:

a. call
periods.

b. maturity
dates.

c. market
prices.D. coupon rates.

e. yields
to maturity.