Multiple choice

1. Which of the following correctly describes the effect of a decline in interest rates on bond prices?

A. The prices of existing bonds rise.;

B. The prices of existing bonds are not affected.;

C. The prices of the existing bonds fall.;

D. The prices of newly issued bonds are lowered.

2. The major source of risk based by investors who purchase bonds is

A. purchasing power risk.;

B. liquidity risk.;

C. event risk.

D. interest rate risk.;

3. A $1000 par value bond that was issued two years ago by the Golden Ibis Corporation has a 6% coupon. If the prevailing market rate for interest on comparable bonds is now 7%, then the Golden Ibis bond pays it bondholders an annual interest income of

A. $70, and the bond would sell for less than its par value.;

B. $60, and the bond would sell for more than its par value.;

C. $70, and the bond would sell for more than its par value.

D. $60, and the bond would sell for less than its par value.;

4. A bond which has a deferred call

A. would not have to be redeemed when it reaches maturity.;

B. could be retired at any time prior to maturity.;

C. could not be retired for a specified period after the date of issue, but after that could be retired at any time.;

D. could be retired at any time during the initial call period, but after that period (usually the first five years after issue).