limits on the issuer's leverage ratio.
B. how the proceeds of the bond issue will be used.
C. the maximum percentage of the issuer's gross assets that can be sold.
7. Which of the following best describes a negative bond covenant? The issuer is:
A. required to pay taxes as they come due.
B. prohibited from investing in risky projects.
C. required to maintain its current lines of business.
8. A South African company issues bonds denominated in pound sterling that are sold to investors in the United Kingdom. These bonds can be best described as:
A. Eurobonds.
B. global bonds.
C. foreign bonds.
9. Relative to domestic and foreign bonds, Eurobonds are most likely to be:
A. bearer bonds.
B. registered bonds.
C. subject to greater regulation.
10. An investor in a country with an original issue discount tax provision purchases a 20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond until the maturity date. The investor will most likely report:
A. a capital gain at maturity.
B. a tax deduction in the year the bond is purchased.
C. taxable income from the bond every year until maturity.
11. A bond that is characterized by a fixed periodic payment schedule that reduces the bond's outstanding principal amount to zero by the maturity date is best described as a:
A. bullet bond.
B. plain vanilla bond.
C. fully amortized bond.
12. If interest rates are expected to increase, the coupon payment structure most likely to benefit the issuer is a:
A. step-up coupon.
B. inflation-linked coupon.
C. cap in a floating-rate note.
13. Investors who believe that interest rates will rise most likely prefer to invest in:
A. inverse floaters.
B. fixed-rate bonds.
C. floating-rate notes.
14. A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is issued with a coupon rate of 6 % and a par value of 1,000. The bond pays interest semi-annually. During the first six months after the bond's issuance, the CPI increases by 2 %. On the first coupon payment date, the bond's:
A. coupon rate increases to 8 %.
B. coupon payment is equal to 40.
C. principal amount increases to 1,020.
15. The provision that provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond's maturity date is referred to as:
A. a put provision.
B. a make-whole call provision.
C. an original issue discount provision.
16. Which of the following provisions is a benefit to the issuer?
A. Put provision
B. Call provision
C. Conversion provision
17. Relative to an otherwise similar option-free bond, a:
A. putable bond will trade at a higher price.
B. callable bond will trade at a higher price.
C. convertible bond will trade at a lower price.
CHAPTER 2
FIXED-INCOME MARKETS: ISSUANCE, TRADING, AND FUNDING
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
● describe classifications of global fixed-income markets;
● describe the use of interbank offered rates as reference rates in floating-rate debt;
● describe mechanisms available for issuing bonds in primary markets;
● describe secondary markets for bonds;
● describe securities issued by sovereign governments, non-sovereign governments, government agencies, and supranational entities;
● describe types of debt issued by corporations;
● describe short-term funding alternatives available to banks;
● describe repurchase agreements (repos) and their importance to investors who borrow short term.
SUMMARY OVERVIEW
Debt financing is an important source of funds for governments, government-related entities, financial institutions, and non-financial companies. Well-functioning fixed-income markets help ensure that capital is allocated efficiently to its highest and best use globally. Important points include the following:
● The most widely used ways of classifying fixed-income markets include the type of issuer; the bonds' credit quality, maturity, currency denomination, and type of coupon; and where the bonds are issued and traded.
● Based on the type of issuer, the three major bond market sectors are the government and government-related sector, the corporate sector, and the structured finance sector. The major issuers of bonds globally are governments and financial institutions.
● Investors make a distinction between investment-grade and high-yield bond markets based on the issuer's credit quality.
● Money markets are where securities with original maturities ranging from overnight to one year are issued and traded, whereas capital markets are where securities with original maturities longer than one year are issued and traded.
● The majority of bonds are denominated in either euros or US dollars.
● Investors make a distinction between bonds that pay a fixed rate versus a floating rate of interest. The coupon rate of floating-rate bonds is expressed as a reference rate plus a spread. Interbank offered rates, such as Libor, are the most commonly used reference rates for floating-rate debt and other financial instruments.
● Interbank offered rates are sets of rates that reflect the rates at which
