Debt Exam
How does one find the annual tax liability on a property?
Taxes are based on assessed valuation, not fair market value. Multiply the tax rate by the assessed value of the property
In a period of steep increases in interest rates, which issuer is most likely to be negatively affected? A.Trucking company B.Utility company C.Mining company D.Technology company
The Best answer is B. Utilities are capital intensive. To obtain long term funds, utilities can issue either stock / bonds. Because of stable revenue stream, utilities can issue large amounts of bonds at favorable interest rates without negatively affective their credit rating. Typically - Utility have 90% of its capitalization come from the sale of bonds with only 10% from equity. If interest rates rise steeply, as its bond mature, the utility must replace them with new bonds at steeply higher interest rates. The increase interest cost & earnings will deteriorate + price of stock will fall. Because the other industries listed cannot issue such a large amount of bonds, the negative impact of higher current market rates is not as great.
Which of the following securities would be assigned a "P" (Prime) rating? A.Commercial Paper B.Tax Anticipation Note C.Common Stock D.Corporate Bond
The best answer is A
The most complete information about a municipal bond's call provisions would be found in the: A.Bond Resolution B.Official Notice of Sale C.Moody's Bond Guide D.Daily Bond Buyer
The best answer is A.
The "Effective" Federal Funds Rate is composed of rates offered by: I selected commercial banks across the United States II selected thrift institutions across the United States III the designated primary U.S. Government securities dealers AI only BIII only CI and II only DI, II, III
The best answer is A. Federal Funds are overnight loans of reserves from commercial bank to commercial bank. The "effective" rate is an average rate for selected banks across the United States. Thrifts cannot loan Federal Funds, nor can all primary dealers, since many of these firms are broker-dealers, not commercial banks.
A corporate bond was issued on Jan 1, 2010, that matures on Jan 1, 2030. The trust indenture allows the corporation to call the bond starting in 2020 at a price equaling 100 1/2 plus an additional 1/4 point premium for every 6 month period remaining until maturity. If the bond is called on Jan 1, 2026, the redemption price will be: A. 102 1/2 B. 102 C. 101 1/2 D. 100 1/2
The best answer is A. If the bond is called on Jan 1, 2026, it has 4 years left to maturity. This is the same as 8 - six month periods. For each six month period prior to maturity that the bond is called, 1/4 point is added to the call price (total equals 2 points). Since the call price is 100 1/2 plus the additional premium of 2 points, the total call price is 102 1/2.
Which of the following statements are TRUE regarding overnight repurchase agreements? I A dealer who needs cash will "sell" some of its inventory overnight to another dealer II A dealer who needs cash will "buy" inventory overnight from another dealer III The investment has interest rate risk IV The investment has no interest rate risk A.I and III B.I and IV C.II and III D.II and IV
The best answer is A. Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. Repos do have interest rate risk, relating to the underlying securities. If interest rates rise, the underlying securities can decline in value. Since the maturity of the underlying securities can be of any length, long maturity values may decline more than the accrued interest to be earned on the agreement. When the borrower of the funds buys back the securities the next day at the pre-agreed price, it buys back securities at more than they are worth!
During a period when the yield curve is inverted: A.short term rates are more volatile than long term rates B.long term rates are more volatile than short term rates C.short term and long term rates are equally volatile D.no relationship exists between short term and long term rate volatility
The best answer is A. Whether the yield curve is ascending (normal), flat or inverted, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors.
All of the following statements are true about commercial paper EXCEPT commercial paper: A. is a funded debt of the issuer B.matures on a pre-set date and at a pre-set price C.is quoted on a yield basis D.is an unsecured promissory note
The best answer is A. Corporate "funded debt" represents long term debt financing of a corporation with at least 5 years to maturity. Since commercial paper has a maximum maturity of 270 days, it is not a funded debt. Commercial paper is quoted on a yield basis; matures at a pre-set date and price; and is an unsecured promissory note of the issuer.
Which of the following statements are TRUE when comparing bonds and preferred stock? I Both bonds and preferred stock have a fixed payout rate II Bonds have a fixed payout rate; preferred stock does not III Both bonds and preferred stock can be convertible into shares of common stock IV Bonds can be convertible; preferred stock cannot AI and III BI and IV CII and III DII and IV
The best answer is A. Both bonds and preferred stocks can be convertible and both have a fixed payout rate. Think preferred stock as a "bond" designed for corporate investment, so that a corporate investor can take advantage of dividend exclusion from taxation.
Which of the following information would be found in a municipal bond resolution? I Any restrictive covenants to which the issuer must adhere II Any call provisions providing for redemption prior to maturity as specified in the contract III The credit rating assigned to the issue by a nationally recognized ratings agency IV The compensation received by the underwriters for selling the issue to the public AI and II only BIII and IV only CI, II, III DI, II, III, IV
The best answer is A. The bond resolution is a contract between issuer and bondholder. Includes all covenants made by issuer, including call provisions.
All of the following statements are true regarding mortgage bonds EXCEPT: A. Mortgage bonds are issued in term maturities B.Default of mortgage bonds is common during recessionary periods C.Mortgage bonds are commonly issued by utilities D.Mortgage bonds are secured by real property
The best answer is B.
Which of the following securities has the highest level of credit risk? A. General Obligation Bond B. Industrial Development Bond C. Equipment Trust Certificate D Mortgage Bond
The best answer is B. An industrial development bond is backed by the rents paid by a corporation, and the guarantee of that corporation. However, there is no actual collateral pledged to back the issue. If the corporation defaults, the bondholders cannot claim any assets to satisfy the debt. Equipment trust certificates have lower credit risk because the equipment is pledged as collateral and mortgage bonds have lower credit risk because real property has been pledged as collateral.
Eurodollar bonds: I are issued in bearer form II are issued in fully registered form III pay interest which is subject to U.S. withholding taxes IV pay interest which is not subject to U.S. withholding taxes A.I and III B.I and IV C.II and III D.II and IV
The best answer is B. Eurodollar bonds are not offered in the U.S. and are issued in bearer form (remember that the U.S. has made it illegal to issue domestic bearer bonds!) These bonds are not subject to withholding taxes (once again, because they are not offered in the U.S.)
Which of the following is an original issue discount obligation? A.GNMA certificate B. Treasury bill C.U.S. Government bond D.FNMA bond
The best answer is B. Treasury Bills are original issue discount obligations.
All of the following statements are true regarding a bond that is "registered to principal only" EXCEPT: A. the bond is negotiable B. interest coupons are detached from the corpus of the bond C. interest payments can be redeemed by anyone D. at maturity, the registered owner receives the face amount of the bond
The best answer is B. A registered to principal only bond has a physical certificate with the bond's dace amount registered in the owners name but interest coupons are attached which are payable to the "bearer". Bonds are negotiable. No New Issues have been sold. However, they still trade in the market today.
The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds AI only BI and III only CII and III only DI, II, III
The best answer is B. Pension plans are "tax qualified" retirement plans - earnings on securities held are tax deferred. No benefit in investing in municipals because of this fact. Investments would be made in Gov and Corp because both have higher interest rates because their interest income is taxable by the fed gov.
Series EE bonds: A.are issued at a discount to face B.are redeemed at par plus interest earned C.pay interest semi-annually D.are actively traded in the secondary market
The best answer is B. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). This is the face value of the bond, and any interest earned is added to the bond's value. The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury (a bank can act as agent for the Treasury issuing and redeeming Series EE bonds). No physical certificates are issued - the bonds are issued in electronic form
Which statement about Auction Rate Securities is FALSE? A. Auction Rate Securities are long-term instruments B.The interest rate on an Auction Rate Security is reset weekly or monthly C.Auction Rate Securities can be put back to the issuer at the reset date D.Auction Rate Securities are available from corporate and municipal issuers
The best answer is C Auction Rate Securities are long-term debt issues where the interest rate is reset weekly (or monthly) via Dutch auction. This gives the issuer the advantage of paying a short-term market interest rate on a long-term security.
If the Federal Reserve enters into repurchase agreements with member banks, the: I Federal Reserve is tightening credit availability II Federal Reserve is loosening credit availability III Federal Funds rate is likely to go down IV Federal Funds rate is likely to go up A. I and III B.I and IV C.II and III D.II and IV
The best answer is C The Federal Funds rate is the interest rate charged between Federal Reserve member banks on overnight loans. The Federal Reserve can influence this rate through open market operations. If the Fed enters into repurchase agreements with member banks, it injects cash into the banks, which tends to drive the Fed Funds rate down (because there is more cash available to lend). Conversely, if the Fed enters into reverse repurchase agreements with member banks, it drains the member banks of reserves, tending to drive up the Fed Funds rate (since there is less cash available to lend).
Net Direct Debt and Overlapping Debt equals: A. Debt per Capita B. Debt to Assessed Valuation C. Net Overall Debt D. Overlapping Debt
The best answer is C.
All of the following statements are true about Treasury Receipts EXCEPT the: A. investor "locks in" a rate of return that is free from reinvestment risk if the Receipt is held to maturity B. underlying bonds are held by a trustee for the beneficial owners C. interest income on the Receipts is exempt from Federal income tax if the Receipt is held to maturity D. Receipts are issued by broker-dealers, who maintain a secondary market in these securities
The best answer is C. The annual accretion is taxable, since the underlying securities are U.S. Governments. At maturity, the receipt will have an adjusted cost basis of par, and will be redeemed at par, for no capital gain or loss.
The term "Funded Debt" refers to: I Short term debt II Long term debt III Corporate debt IV U.S. Government debt AI and III BI and IV CII and III DII and IV
The best answer is C. Funded debt is a somewhat archaic term that refers to corporate debt that is long term. This is considered to be part of a corporation's long term (permanent) funding.
The ratio of net direct debt plus overlapping debt to assessed valuation of property is used to: I analyze general obligation bonds II evaluate the issuer's creditworthiness III evaluate the issuer's overall ability to service its debt burden IV evaluate the issuer's ability to collect taxes owed A. I only B. III and IV only C. I, II, III DI. , II, III, IV
The best answer is C. The ratio of overall debt is assessed valuation is used to evaluate general obligation bonds. The lower the ratio the better the creditworthiness. Ratio does not indicates how good a job the municipality does collective the taxes due.
Market uncertainty regarding future interest rate levels would indicate that the yield curve should be: A.ascending B.descending C.inverted D.flat
The best answer is D. Under the "market expectations" theory of yield curves, when investors expect interest rates to rise in the future, the yield curve will have an upward slope. Conversely, when investors expect interest rates to fall in the future, the yield curve will have a downward slope. If investors are uncertain as to the future direction of market interest rates, then the yield curve will be flat.
An ETN does NOT have which risk? A.Market risk B.Credit risk C.Marketability risk D.Reinvestment risk
The best answer is D. ETNs make no interest or dividend payments - so they do not have reinvestment risk. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates.
All of the following information about corporate bonds would be found in the Standard and Poor's Bond Guide EXCEPT: A.Rating B.Yield C.Price D.Trading Volume
The best answer is D. S&P Bond Guide is published on the web and gives a capsule summary of every outstanding corporates issue. Including: Recent Price, Rating, and Yield.
A customer owns a long-term negotiable CD. If the customer wishes to tender the CD prior to maturity, the registered representative should inform the customer that: A.a prepayment penalty will be charged B,he or she will receive par value of the principal plus accrued interest C.the CD may not be redeemed prior to maturity D.the customer will receive the market value plus accrued interest
The best answer is D. Customer will receive the market value of the CD at that point in time - they market interest rates have risen, the CD value will be lower than par
Which of the following debt securities may be issued by a corporation? I Mortgage Bonds II Collateral Trust Certificates III Revenue Bonds IV Income Bonds A. I and IV only B. II and III only C. I, II, IV D. I, II, III, IV
Best answer is C. Corporations do not issue revenue bonds.
Who is considered to be creditors of a corporation?
Bondholders are creditors of a company
