Ch. 2 - Debt Securities - Test Topics

A customer purchases five 6-1/4% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? A) $156.25 B) $625.00 C) $468.75 D) $312.50

A) $156.25

If a bond has a call provision, this will tend to: A) make the bond less attractive to investors because a call would terminate the interest payments. B) place a floor on how low the price will decline. C) have no effect on the price. D) make the bond more attractive to investors because most bonds are called at a premium.

A) make the bond less attractive to investors because a call would terminate the interest payments. Callability is unattractive to the investor. It is attractive to the issuer because, with a call, the bonds are bought back at par or a small premium, and interest payments end.

A characteristic not associated with a Series EE bond is: A) marketability. B) a fixed maturity date. C) a fixed rate of return. D) security of principal.

A) marketability. Marketability refers to the ability of the owner to sell (market) the Series EE bond to anyone who may desire to purchase it. Savings bonds are not marketable. They can be redeemed only by the government. They are not allowed to be transferred from one owner to another; hence, they are nonmarketable.

The function of the Federal National Mortgage Association (FNMA) is to: A) purchase FHA-insured, VA-guaranteed, and conventional mortgages. B) provide financing for government-assisted housing. C) issue conventional mortgages. D) guarantee the timely payment of interest and principal on FHA and VA mortgages.

A) purchase FHA-insured, VA-guaranteed, and conventional mortgages.

A Notice of Defeasance informs bondholders that: A) the funds for the principal and the interest are in escrow. B) the purpose of the issue has been defeated and the bonds are called. C) the interest and the principal will not be paid. D) the facility has been condemned and the bonds have been called.

A) the funds for the principal and the interest are in escrow. A defeased issue is one in which the issuer placed U.S. government securities in the bank as collateral for the old issue.

Another term for INCOME BOND

Adjustment Bond

If interest rates are falling, issuers will likely call which of the following bonds? I.Bonds with low coupons. II.Bonds with high coupons. III.Bonds trading at a discount. IV.Bonds trading at a premium. A) I and III B) II and IV C) I and IV D) II and III

B) II and IV

All of the following statements regarding PAC CMOs are true EXCEPT: A) PACs have a more certain maturity date than comparable TACs. B) PACs have higher yields than comparable TACs. C) PACs have a lower than average prepayment risk. D) PACs have companion tranches.

B) PACs have higher yields than comparable TACs.

A quote of 6.20 bid 6.18 offered would most likely be a quote on a: A) Ginnie Mae bond. B) T-bill. C) GO bond. D) T-bond

B) T-bill.

Bond trust indentures are required for: A) municipal revenue bonds. B) corporate debt securities. C) Treasury securities. D) municipal general obligation bonds.

B) corporate debt securities.

All of the following securities are exempt from the Trust Indenture Act of 1939 EXCEPT: A) preferred stock. B) debentures. C) Treasury bonds. D) municipal bonds.

B) debentures.

Preferred stock is: A) high-quality debt instrument B) equity instrument

B) equity instrument

An investor interested in acquiring a convertible bond as part of his investment portfolio would: A) want the assurance of a guaranteed dividend on the underlying common stock. B) want the safety of a fixed-income investment along with potential capital appreciation. C) be interested in tax advantages available to convertible debt securities. D) seek to minimize changes in the bond price during periods of steady interest rates.

B) want the safety of a fixed-income investment along with potential capital appreciation.

Brokered CDs, like other CDs issued by a bank directly to customers, carry FDIC insurance up to A) $500,000 B) $25,000 C) $250,000 D) $100,000

C) $250,000

A new municipal bond issue had a dated date of January 1, 2015. The first coupon was due on August 1, 2015. The customer bought for settlement on September 1, 2015. How many months of accrued interest must he pay at settlement? A) 7 months B) 8 months C) 1 month D) 6 months

C) 1 month

Collateralized mortgage obligation (CMO) tranche A has been created to have the most predictable near term principal pay off. A tranche set up in this way will have: I. the highest reinvestment risk. II. the least reinvestment risk. III. a higher yield. IV. a lower yield. A) II and IV. B) I and IV. C) I and III. D) II and III.

C) I and III.

A married couple with a two-year-old child wants a suitable investment to help meet the financial obligations for the child's college education. Which of the following choices are the most suitable alternatives? I.A CMO tranche scheduled to mature in 5 years II.A STRIP scheduled to mature in 15 years III.Treasury receipts IV.A money-market fund A) I and IV B) II and IV C) II and III D) I and III

C) II and III

Which of the following is NOT true regarding Treasury Receipts? A) They are not backed by the faith and credit of the U.S. government. B) Treasury securities held in trust collateralize the Receipts. C) Interest income is taxed at maturity. D) They pay interest at maturity.

C) Interest income is taxed at maturity.

Crossover refunding, which is a type of advance refunding, is best described by which of the following statements? A) Revenues can never cross over to fund a new issue. B) The revenue stream is halted completely from the project until the new bonds are issued. C) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called. D) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering.

C) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called.

A debenture maturing in 2019 is bid at 77-7/8 and asked at 78-3/4. Which of the following is TRUE of the spread? A) The spread represents 3/4 per bond equivalent to $0.75. B) The spread represents 3/4 per bond equivalent to $75. C) The spread represents 7/8 per bond equivalent to $8.75. D) The spread represents 7/8 per bond equivalent to $87.50.

C) The spread represents 7/8 per bond equivalent to $8.75.

Debt normally issued by big corporations with reliable credit ratings who seek to finance short-term needs best describes: A) revenue anticipation notes. B) step-up CDs. C) commercial paper. D) T-bills.

C) commercial paper. Also known as promissory notes this is the definition of commercial paper. They are short-term corporate issued instruments sold at a discount and maturing at par.

If LMN, Inc. has filed for bankruptcy, in what order would interested parties be paid? 1.Holders of secured debt. 2.Holders of subordinated debentures. 3.General creditors. 4.Preferred stockholders. A) 4, 1, 2, 3. B) 3, 1, 2, 4 C) 1, 2, 3, 4 D) 1, 3, 2, 4

D) 1, 3, 2, 4

All of the following bonds have 5 years to go to maturity. Which would have the greatest price change in response to a change in interest rates? A) 7-½%, BBB rated, price 95. B) 7-½%, AA rated, price 108. C) 7-½%, A rated, price 102. D) 7-½%, B rated, price 88.

D) 7-½%, B rated, price 88. Factors increasing a bond's response to an interest rate change include: time to go to maturity, distance from par, and lower rating. The bond with a lowest ratings (B) and farthest from par (88) would have the greatest price change.

Which of the following is NOT part of the Federal Farm Credit System (FFCS)? A) Federal Intermediate Credit Bank. B) Bank For Cooperatives. C) Federal Land Bank. D) Federal Home Loan Bank.

D) Federal Home Loan Bank.

If the U.S. dollar has been falling against foreign currencies, then which of the following are TRUE?I. U.S. imports are likely to rise. II. U.S. exports are likely to rise. III. Foreign currencies buy fewer U.S. dollars. IV. Foreign currencies buy more U.S. dollars. A) I and IV B) I and III C) II and III D) II and IV

D) II and IV

Which of the following statements best describes banker's acceptances? A) They are used to satisfy short-term cash needs of broker/dealers. B) They are unsecured promissory notes with long term maturities issued by financially strong corporations. C) They are an asset that provides a competitive rate of return, broad diversification, and liquidity. D) They are used primarily to finance imports and exports.

D) They are used primarily to finance imports and exports.

An investor wants to invest $20,000 but anticipates needing those funds in 5 years for a business investment. Currently, with inflation rising, the government is expected to take action to push interest rates up to reduce the money supply. Given these conditions, which of the following securities would be the least suitable for this investor who needs a specific amount of money in 5 years? A) Zero-coupon bond maturing in 4 years B) U.S. Treasury bonds maturing in 6 years C) Corporate bonds maturing in 5 years D) Zero-tranche CMO with estimated 5 years life

D) Zero-tranche CMO with estimated 5 years life

When a corporation issues a long-term bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the: A) call loan rate. B) par value of the bond. C) tax status of the bond. D) cost of money in the marketplace.

D) cost of money in the marketplace. Money is a commodity, and its cost is determined by supply and demand. When the cost of money is higher, borrowers incur a higher interest rate. The call loan rate impacts broker/dealers, not issuers of bonds. The par value of the bond has nothing to do with the cost of borrowing and, with almost no exception, all corporate bonds pay taxable interest so that is not a variable factor.

The floating exchange rate for a nation's currency: A) is set by the nation's central bank. B) fluctuates based on the LIBOR. C) is tied to the current market price of gold. D) fluctuates based on the values of other currencies.

D) fluctuates based on the values of other currencies.

All of the following may be included in an advertisement for a CMO issue EXCEPT a: A) disclosure that payment assumptions may or may not be met. B) disclosure of the CMO's coupon rate and final maturity date. C) generic description of the CMO tranche. D) statement that the CMO is guaranteed by the U.S. government.

D) statement that the CMO is guaranteed by the U.S. government.

True or False: Commercial paper is quoted as a percentage of par.

FALSE. Commercial paper, like all zeroes, is quoted on a discounted yield basis.

True or False: Fitch Ratings specialize on the insurance marketplace.

False. A.M. Best has historically specialized exclusively on the insurance sector.

True or False: Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC.

False. Eurodollar bonds are NOT subject to foreign exchange risk.

True or False: Asset-backed securities have minimal risk.

False. The value of asset-backed securities is backed by the expected cash flow from a pool of assets such as mortgages, other types of loans, credit card debt, and leases. Pooling individual smaller and sometimes less liquid assets into larger securities allows them to be sold easier to investors. This process is known as securitization. However, the cash flow from these assets is not guaranteed in any way, and therefore, these securities cannot be characterized as carrying minimal risk.

True or False: A bond that is trading at a premium has a yield to maturity that is lower than its coupon rate.

True

True or False: Interest on Treasury Bills, Bonds, and Notes are taxable at the federal level only.

True.

True or False: A put feature is advantageous to the bondholder, and therefore carries with it a lower yield than nonputtable bonds.

True. Exercise of the put feature is at the discretion of the bondholder, not the issuer, and will most likely be used if interest rates are rising.

True or False: Exchange-traded notes (ETNs) are unsecured debt securities issued by financial institutions such as banks.

True. Their prices can be impacted by changes in the credit rating of the issuer.

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Zero Coupon Bond