Exercise

Circle TRUE or FALSE

1. 1. TRUE or FALSE. A bond’s coupon rate depends on the creditworthiness of the issuer.
2. 2. TRUE or FALSE. A ratings agency is hired by a potential investor, a transfer agent, or a broker/dealer to assess the creditworthiness of a bond issue.
3. 3. TRUE or FALSE. Bearer bonds are registered to a specific owner—the bearer—making them undesirable to tax cheats.
4. 4. TRUE or FALSE. When book-entry bonds are held in street name, the beneficial owner is the broker-dealer.
5. 5. TRUE or FALSE. If two bonds are comparable, but one has a call feature and the other has a put feature, the bond with call feature will probably have a higher coupon rate.

Answers

1. 1. TRUE. The coupon rate depends on the creditworthiness of the bond, which depends on the creditworthiness of the issuer. An issuer with a strong credit rating will be able to borrow at a lower rate than an issuer with a poor credit rating. Risk is reflected in the coupon rate.