Chapter 5: Questions - SIE Exam
An investment that provides investors with a floating rate of interest, a stated maturity, and the ability to put the security back to an intermediary on a pre-determined basis is referred to as: - A stock put option - A variable rate demand obligation (VRDO) - A perpetual puttable preferred stock - A tax-deferred non-qualified, variable annuity
A variable rate demand obligation (VRDO) Explanation - Variable rate demand obligations (VRDOs) provide a floating rate, a fixed maturity, and the ability to sell (i.e., put) the security back to a financial intermediary. VRDOs can be put back at any time that the interest rate is reset, which may be daily, weekly, or monthly.
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be: $1,051.25 $1,052.40 $1,054.00 $1,057.50
$1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price:Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
The minimum denomination for negotiable certificates of deposit is: - $100,000 - $10,000 - $5,000 - $1,000
$100,000 The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.
Which of the following securities is NOT backed by the credit of the U.S. government? - Treasury bills - Treasury STRIPS - Government National Mortgage Association (GNMA) bonds - Federal National Mortgage Association (FNMA) bonds
- Federal National Mortgage Association (FNMA) bonds Federal National Mortgage Association (FNMA) bonds are issued by a privately owned organization and are not backed by the U.S. government. All of the other choices are directly backed by the U.S. government.
The credit rating of a municipality will likely improve with a(n): - Increase in tolls - Increase in property taxes - Decrease in residents - Decrease in fees being charged for licenses
Increase in property taxes Explanation: An increase in property taxes results in more funds becoming available to the municipality. As a result, the credit rating of the municipality will likely improve. Decreases in residents and fees being charged for licenses will generally result in a decline in the credit rating. An increase in tolls will provide a benefit to the facility, not the municipality. (17520)
When purchasing Treasury notes, an investor should understand: Delivery is in either book entry or physical form Interest is paid at maturity Principal is adjusted for inflation Interest is paid semi-annually
Interest is paid semi-annually Treasury notes and bonds pay interest semi-annually. Treasury securities are only issued in book entry form. Treasury Inflation Protected Securities (TIPS) are adjusted for inflation.
Which of the following is TRUE regarding the tax treatment of municipal bonds? - Interest and capital gains are taxable. - Interest and capital gains are tax-free. - Interest is taxable, but capital gains are tax-free. - Interest is tax-free, but capital gains are taxable.
Interest is tax-free, but capital gains are taxable. The interest paid on municipal bonds is federally tax-free; however, any resulting capital gains are taxable.
Interest on Treasury Inflation Protected Securities (TIPS) is: - Subject to federal and state income tax - Exempt from federal and state income tax - Subject to state income tax, but exempt from federal income tax - Subject to federal income tax, but exempt from state income tax
Subject to federal income tax, but exempt from state income tax Interest on any U.S. Treasury security is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.
Treasury bonds are: - Exempt from both federal and state taxes - Exempt from federal taxes, but subject to state taxes - Subject to both federal and state taxes - Subject to federal taxes, but exempt from state taxes
Subject to federal taxes, but exempt from state taxes Explanation: Treasury bond interest is subject to federal taxes, but exempt from state taxes. Municipal bond interest is taxed in the opposite way; it's exempt at the federal level, but may be subject to state taxes. Corporate bond interest is fully taxable at both the federal and state levels.
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: - They trade in the over-the-counter market - All are government guaranteed - Short-term securities are quoted on a discount yield - Long-term securities are quoted as a percentage of par
all government guaranteed Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.
A municipality borrowing for a short-term period to finance a capital project would issue: - Commercial paper - Tax anticipation notes - Debentures - Bond anticipation notes
bond anticipation note A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
Investors who buy GNMA securities are not subject to which of the following risks? - Reinvestment risk - Credit risk - Prepayment risk - Capital risk
credit risk Explanation - U.S. government directly backs GNMA securities; therefore, investors who buy them avoid credit risk (also referred to as default risk).
Each of the following are considered types of secured debt, EXCEPT: - Mortgage bonds - Collateral trust bonds - Debentures - Equipment trust certificates
debentures
A municipality has issued a long-term municipal bond which indicates that the state legislature will provide support if the bond goes into default. What type of municipal bond offers this protection? - Double barreled bond - Revenue bond - Moral obligation bond - Special assessment bond
moral obligation bond Explanation: When the state legislature agrees to be responsible for a bond in the event of default, it's referred to as a moral obligation bond. However, being morally obligated doesn't mean the state legislature is legally obligated for the bond.
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process? - Mortgage bonds - Debenture bonds - Common stock - Participating preferred stock
mortgage bonds When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., mortgage bondholders), then unsecured creditors (debenture holders), then preferred stockholders, and last the common stockholders. This would make mortgage bonds the senior security of those listed.
The price for a Treasury bond with a principal value of $1,000 is 94-18. What's the dollar price of this bond? $945.63 $945.50 $1,000 $941.80
$945.63 In this case, 94-18 (or 94 18/32) becomes 94.5625%. A bond priced at 94.5625% of par is equal to $945.63.
A U.S. Treasury bond is selling in the market at 95.18. The dollar value of this bond is: - $951.80 - $955.62 - $958.75 - $952.18
$955.62 U.S. Treasury bonds are quoted in full points and 32nds of a point. A T-bond quote of 95.18 represents 95 18/32. By converting the fraction to a decimal, the quote becomes 95.5625 percent of the par value of $1,000. $1,000 x 95.5625% = $955.62.
Which of the following securities is an example of a collateralized time draft? - Commercial paper - A bankers' acceptance - American Depository Receipts - Eurodollars
A bankers' acceptance
What is the process used to calculate accrued interest for municipal bonds? - 30-day month and a 360-day year is used. - Actual days in every month and a 360-day year is used. - Actual days in every month and a 365-day year is used. - A 30-day month and a 365-day year is used.
Answer - 30 Day month & 360 day year Corporate, municipal, and government agency debt use a 30-day month and a 360-day year calendar to calculate accrued interest. T-notes and T-bonds use the actual days in every month and a 365-day year for accrued interest calculations.
Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds? - Income taxes - Property taxes - Licensing fees and traffic fines - Tolls collected at a tunnel located in the municipality
Answer - Tolls collected at a tunnel located in the municipality A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.
Which type of bond is MOST likely secured by an excise tax, cigarette tax, or gasoline tax? - GO bond - Special tax bond - Double-barreled bond - Special assessment bond
Answer - special tax bond A special tax bond is a type of revenue bond that's typically financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond? - Approval by a majority of legal age voters - Approval by the state legislature - Approval by the bond trustee - Approval by the appropriate state agency
Approval by the state legislature Explanation: State legislative approval is required before a municipality can begin making payments on a moral obligation bond.
A security that works as a letter of credit and used for import-export financing when conducting international business is referred to as: - Commercial paper - A bankers' acceptance - Certificate of deposit - Federal funds
Banker's acceptance Explanation: Bankers' acceptances (BAs) operate like a letter of credit and are often used for import-export financing. They're considered a time draft that's drawn on a bank and the bank accepts responsibility for payment. BAs are secured by the issuing bank and the goods being purchased by the importer.
The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities? - GNMA (Ginnie Mae) securities - Treasury notes - Treasury Receipts - FHLMC (Freddie Mac) securities
FHLMC (Freddie Mac) securities The U.S. government guarantees the payment of interest and principal on all Treasury securities as well as securities that are issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities that are issued by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), which is a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.
A grant anticipation note is normally paid from: - Proceeds from the issuance of long-term bonds - Funds received from the federal government - Revenues received at a future date - Receipts of future property taxes
Funds received from the federal government A grant anticipation note (GAN) is normally paid from funding provided by the federal government. A bond anticipation note (BAN) is paid from proceeds from the issuance of long-term bonds. A revenue anticipation note (RAN) is paid from revenues to be received at a future date. A tax anticipation note (TAN) is normally paid from future tax receipts, such as property (ad valorem) taxes.
An investor has purchased a Bristol County Public Power System revenue bond. Which of the following statements is TRUE concerning this investment? - Earnings from the bond are exempt from federal, state, and local taxes - Payment of principal and interest is ultimately the responsibility of Bristol County - If the power system declares bankruptcy, the bonds will go into default - The assets of the power system secure the bond
If the power system declares bankruptcy, the bonds will go into default Interest from a revenue bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a revenue bond is backed by a stream of income from a specific project or facility. Unlike a general obligation bond, it is not backed by a general promise by the issuer to repay the debt. In this example, only the revenue (not the assets) of the power system back the bonds. If the power system cannot produce enough revenue to pay the bond's interest and/or principal, there will be a default. Bristol County is not obligated to use any other funds to make payments on the bonds.
If a municipal bond is backed by the revenues of a facility and the income is insufficient to make the debt service payment, which of the following statements is TRUE? - The bond's indenture will need to be amended. - The bond's interest rate will increase. - The issuer will default on its next payment. - The issuer is required to close the facility.
Issuer will default on it's next payment Explanation - A municipal bond that's backed by revenues of a project or facility is referred to as a revenue bond. When the income is insufficient to make the debt service payments (i.e., interest and/or principal payments), the issuer will default on that bond.
Which of the following is TRUE regarding the ultimate responsibility for paying the principal and interest on a guaranteed bond? - It's the full faith and credit of the U.S. government. - It's the full faith and credit of the issuer. - It's the full faith and credit of another company. - It's the full faith and credit of a municipality.
It's the full faith and credit of another company.
Of the choices listed, which one is Moody's lowest rating for a municipal note? - MIG 1 - MIG 3 - Aaa - D
MIG3 MIG stands for Moody's Investment Grade and refers to ratings given municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds, and C is its lowest rating for bonds.
Which of the following recommendations will protect assets if there's an impending large market decline? - Sell covered calls on all of the stocks in a portfolio - Buy an S&P 500 ETF - Move investments into cash and equivalents - Invest in a managed large-cap growth fund
Move investments into cash and equivalents Moving money into cash and equivalents (i.e., money-market securities) will provide investors with the most protection. Selling covered calls will generate some income, but will not provide protection over the short-term.
What's the primary difference between STRIPS and Treasury receipts? - STRIPS pay interest and Treasury receipts do not. - Treasury receipts pay interest and STRIPS do not. - STRIPS are backed by the full faith and credit of the U.S. government, but Treasury receipts are not. - Treasury receipts are backed by the full faith and credit of the U.S. government, but STRIPS are not.
STRIPS are backed by the full faith and credit of the U.S. government, but Treasury receipts are not.
How often do treasury notes pay interest to investors? - semiannually - quarterly - annually - at maturity
Semiannually Both Treasury notes and Treasury bonds pay interest semiannually, just like corporate and municipal bonds. However, since Treasury bills are short-term instruments, they're issued as zero-coupon bonds and don't pay interest periodically. Instead, investors who buy Treasury bills receive their interest when the T-bills mature.
For an Industrial Development Bond (IDB), the primary source that backs the bond is: The issuing authority only The leasing corporation only The issuing authority and the leasing corporation The treasurer of the city or town of issuance
The leasing corporation only An IDB is issued by a municipality, but secured by a lease agreement with a corporation.
Which of the following statements about municipal revenue bonds is NOT TRUE? - They are not subject to the debt limitations that apply to general obligation bonds - The maturity of the bonds will equal the useful life of the facility being built - They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities - The interest and principal payments are derived from the funds being generated by the facility
The maturity of the bonds will equal the useful life of the facility being built Explanation: Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility's useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: - Interest rates are set at specified intervals - They are often issued by municipalities - They are long-term securities with short-term trading features - They have a put feature allowing the holder to redeem the security at par
They have a put feature allowing the holder to redeem the security at par Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.
Which bonds are considered the most liquid? Corporate bonds Municipal bonds Treasury bonds Mortgage bonds
Treasury bonds Liquidity represents the ability to buy and sell a stock or bond quickly. Since the U.S. Treasury is one of the largest issuers in the world, T-Bonds are extremely liquid with a significant number of buyers and sellers. Corporate bonds and municipal bond issuers are smaller than the U.S. government and their bonds will have less liquidity.
A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S. markets, and is denominated in U.S. dollars called a: - Global mutual fund - Eurodollar bond - Yankee bond - Repurchase agreement
Yankee Bond Explanation: Yankee bonds are issued in the U.S. by foreign corporations and governments, are dollar-denominated securities, and trade in U.S. markets. Yankee bonds are normally issued by foreign entities when conditions in the U.S. are better than in the foreign country. Eurodollar bonds are issued by U.S. companies and sold to investors overseas and pay their interest in Eurodollars (dollars on deposit in banks outside the U.S.). Since Eurodollar bonds are not initially offered to investors in the U.S., they are exempt from SEC registration.
U.S. government agency issues are: - Exempt from federal taxes. - Exempt from registration under the Securities Act of 1933. - Issued in bearer form only. - General obligations of the federal government.
exempt from registration under the securities act of 1933 Agency securities (e.g., pass through securities that are issued by GNMA, FNMA and FHLMC) are exempt from the registration requirements of the Securities the Act of 1933. Agency securities are fully taxable at the federal, state, and local levels. Although GNMA is backed by the U.S. government, none of the agency bonds are considered a general obligation of the U.S. federal government. While many debt instruments were originally issued in bearer form, today, most bonds are issued in book-entry form (electronic ownership).
Which of the following is NOT typically associated with issuing a general obligation bond? - Feasibility study - Competitive sale - Voter approval - Debt ceiling limitations
feasibility study
Bonds that are backed by the taxing authority of state or municipal governments are referred to as: - Moral obligation bonds - Special assessment bonds - General obligation bonds - Private activity bonds
general obligation bonds
A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used? - High-quality commercial paper - Long-term municipal zero-coupon bonds - U.S. Treasury bonds - High-quality preferred stocks
high quality commercial paper The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation's needs.
Which of the following does a variable rate demand obligation (VRDO) offer to investors that an auction rate security (ARS) does NOT? Tax-free income Long-term maturity Put option Adjustable interest
put option
A town has started the construction of public sewers. This project is likely paid by a(n): -Special assessment bond - Industrial development bond - Moral obligation bond - Equipment trust certificate
special assessment bond Public sewers are often built with the proceeds of a special assessment bond. A special assessment is a charge against property that receives a benefit from the improvement. The ongoing cost of operating and maintaining the sewer system plus the payment of debt service on sewer bonds issued for this purpose, may be paid from property taxes or fees
A quote of 5.90 - 5.75 is a quote for which of the following securities? - Treasury bills - Treasury notes - Treasury bonds - A mortgage-backed security
treasury bills Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid. The lower yield (5.75) represents the higher price and is the ask (offer). The other securities are all quoted as a percentage of par in 32nds.