Question

Questions 1 to 10 are false statements. Please re-write each statement so that it is true. It may be as simple as one word change or more complex.

1. A callable bond is one in which the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.

2. There is no default risk with either Treasury bonds or municipal bonds.

3. The dirty price of a bond plus accrued interest is known as the "clean" price of the bond.

4. When a city issues revenue bonds, the interest and principle are backed by the revenue received from property taxes of the municipality.

5. The way that TIPS protect against inflation is because the coupon rate is changed every six months by the inflation rate as measured by the consumer price index (CPI).

6. All else equal, (maturity, coupon rate, face value, etc.) a bond that is callable should have a lower yield-to-maturity than a convertible bond by the same issuer.

7. When a bond is sold between coupon payment dates, the accrued interest owed to the bond buyer decreases as the next coupon payment date approaches.

8. T-notes and T-bonds are issued in minimum denominations of $10,000 or multiples of $10,000.

9. Some corporate bonds may have a deferred call provision. That means that the bondholder can “defer” returning the bond to the company if it is called and hold the bond to maturity.

10. Most all corporate bonds are traded on an exchange market and only a select few trade over-the-counter through bond dealers.

Answer 1

1. A callable bond provides the issuer of the bond a right but not the obligation to redeem the bond before its given maturity date. These are also called as embedded call options.

2. Treasury bonds are often considered as default-free in the US market as there are fewer chances that the country would default, but there is a history of countries being defaulted.

The same holds with municipal bonds there are chances of states being default on their payments

so t bonds and municipal bonds are held default risk

3. Dirty price is the sum of the price of the bond and the interest accrued to date. Whereas the clean price is the price of the bond excluding interest payments

Clean price = Dirty price - Accrued Interest

4.

Revenue bonds are issued are guaranteed according to the specific revenue source of the issuer.

Eg- Road and transport authority with the issue by the bonds and pay the interest and principal from the revenue generated

Usually, Citi bonds are municipal bonds