1. Suppose the price of a bond is initially $900 but increases to $950. What is happening to the interest rate on that bond?
a. It increases.
b. It decreases.
c. It remains constant.
d. We cannot tell without more information.
2. Suppose you buy a bond for $940 and it will pay you back $1,000 one year from now. What interest rate are you receiving?
a. $60
b. 6.0%
c. 6.2%
d. 6.4%
3. What does the "par value" of a bond represent?
a. the price of the bond on the bond market
b. the price of the bond at the time of purchase
c. the "fair market" price for the bond
d. the price of the bond at maturity
4. Standard & Poor's has several bond ratings. Which of the ratings below indicates the bond more likely to default?
a. B
b. BBB
c. 1
d. 2
5. What is the term that describes a company's combining several home mortgages together and selling them as a new financial instrument?
a. securitization
b. bundling
c. bonds
d. Treasury securities
6. You purchased an IBM bond with a face value of $10,000 and an interest rate of 25%. Suddenly the market interest rate changed, which raised your bond price by $600. Based on the given information, calculate the current market interest rate.
a. 6%
b. 16%
c. 41%
d. 9%
7. You purchased a Microsoft bond for $500, which promises to pay you 5% interest. If the market interest rate is currently 7% and you want to sell your bond, you can expect to receive
a. $500.
b. less than $500.
c. more than $500.
8. You purchased a bond issued by firm XYZ that was rated AA. After a few months you find out that the ratings of the bonds have changed to BBB. As a result, you can conclude that XYZ will pay ____________ interest rates on the new bonds that it will issue now.
a. higher
b. lower
c. the same
d. We need information on either the price or face value of the bond to answer this question.
9. The presence of secondary markets ______________ the interest rates that firms have to pay on bonds issued by them.
a. increases
b. decreases
c. doesn't affect
10. Which of the following represent differences between stocks and bonds? (Select all that apply.)
a. Those who buy stock in a company actually own a percentage of the company. Those who own bonds do not own part of the company.
b. From 1960 to the present, stocks have provided investors with higher returns than bonds.
11. In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You fill out an application with an online company that specializes in start-up loans funded through a group of banks. Is this financing option direct or indirect?
a. direct
b. indirect
c. unable to determine from the information given
12. In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You appear on a reality show where you pitch your idea to potential investors. Someone likes you, and they write you a check to get things going. Is this
financing option direct or indirect?
a. direct
b. indirect
c. unable to determine from the information given
13. In order to earn some extra money to pay for college, you have decided to open your own tattoo parlor one block from campus. You come up with a business plan and realize that you will need financing to get your business off the ground. You borrow money from classmates with the promise to repay them with interest in two years. Is this financing option direct or indirect?
a. direct
b. indirect
c. unable to determine from the information given
14. In 2008, when the U.S. automobile industry was struggling, the price of Ford Motor Company bonds rose. If originally a one-year Ford bond had a face value of $10,000 and a price of $9,500, what was the interest rate?
a. -5%
b. 5%
c. 5.26%
d. -5.26%
15. Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. How will demand be affected if a ratings agency upgrades your bond rating to AA?
a. increase
b. decrease
c. stay the same
16. Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, How will this affect the price of your bond?
a. price will increase
b. price will decrease
c. price will stay the same
17. Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB. If a ratings agency upgrades your bond rating to AA, how will this affect your cost of borrowing?
a. cost of borrowing will increase
b. cost of borrowing will decrease
c. cost of borrowing will stay the same
18. Which of the following statements provides the clearest reason for why it is beneficial to the U.S. when China buys U.S. government bonds?
a. When China owns U.S. financial assets, they own a part of the country.
b. When China owns U.S. financial assets, they have no reason to go to war with the United States.
c. When China owns U.S. financial assets, they can assist U.S. companies with new technology.
d. When China owns U.S. financial assets, they help to keep domestic interest rates low.
e. When China owns U.S. financial assets, they can provide U.S. companies with lowcost labor.