Exercise

Answer true or false.

1. _____ A bond’s coupon rate depends on the creditworthiness of the issuer.

2. _____ 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. _____ The Tax Equity and Fiscal Responsibility Act of 1982 prohibited the further issuance of registered bonds.

4. _____ When book-entry bonds are held in street name, the beneficial owner is the broker-dealer.

5. _____ All else equal, an investor would rather own a callable bond rather than a bond with a put feature because the coupon rate is higher.

Answers

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.

2. False.