Series 65 Study Questions: CH2

Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return?

$100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 5.4% income return. The IAR suggests a stock paying a $1.73 quarterly dividend. That stock will meet the income objective if it has a current market price of

$128.15 $1.73*4 = $6.92 $6.92/5.4% = $128.15

A customer purchased a 5% U.S. government bond yielding 6%. A year before the bond matures, new U.S. government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably did which of the following?

1. Bought it at a discount 2. Sold it at a premium

An 8% corporate bond is offered on an 8.25 basis. Which of the following statements are true?

1. Current yield is higher than nominal yield. 2. Nominal yield is lower than YTM.

Which of the following would make a corporate bond more subject to liquidity risk?

1. Long-term maturity 2. Low credit rating

When investing in a foreign bond fund, a customer will profit if which of these occur?

1. The U.S dollar weakens. 2. Foreign currencies strengthen.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is

2.00% The current yield on a stock is computed by dividing the annual dividend rate by the current market price.

BFJ Corp.'s 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock would receive

20 Shares ($1,000/ $50)

GHI currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If GHI's market price is $40.00, the current yield is

5.00% $0.50*4 = $2.00 $2.00/$40 = 5.00%

Which of the following statements regarding credit risk is not true?

A A-rated mortgage bond has less credit risk than a AA rated debenture.

Which of the following statements represents an advantage of a municipal general obligation (GO) bond over a revenue bond?

A GO bond generally involves less risk to the investor

Which of the following is true of Ginnie Maes but not of other agency mortgage-backed securities?

Backed by the full faith and credit of the U.S government

Which of the following usually does not pay interest semiannually?

GNMA

An investor interested in monthly interest income should invest in...

GNMAs

If a resident of New York City purchases an Albany, New York, general obligation bond that yields $600 of interest during the course of the year, how is the interest taxed?

It is not subject to federal income tax

A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include

the semiannual interest payments of $30.

An advantage of being a bondholder compared with owning common stock in the same corporation is that

Income payments are more reliable

Which of the following is unlikely to be issued at a discount?

Jumbo CD

Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today, that bond is priced to yield 4.6% to maturity in five years. If the bond is called at par in one year, the bond's yield will be

Less than 4.6%

The price of which of the following will fluctuate most with a change in interest rates?

Long-term bonds

Which type of risk is a mortgage-backed security most likely to experience?

Reinvestment risk

Which of the following is the most significant difference between corporate secured debt and unsecured debt?

Secured debt has specific collateral pledged to protect the lender's interest.

Which of the following debt instruments does not make periodic interest payments?

T-bills

The annual interest payment divided by the current dollar price of a bond is

The current yield.

Which of the following is a characteristic of an investment-grade general obligation municipal bond?

The taxing authority of the issuing government or municipality backs the issue's repayment.

Investors interested in acquiring convertible debentures as part of their investment portfolio would

Want the safety of a fixed-income investment along with potential capital appreciation.

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is

a Mortgage bond

GNMA mortgage-backed securities are

a direct obligation of the U.S. government.

One of the likely consequences of a rating downgrade on a bond is

a reduction in the market price of the bond.

The call feature available on some bonds

allows the issuer the option to escape high interest rates if market rates decline.

Corporate bonds are considered safer than common stock issued by the same company because

bonds place the issuer under and obligation but stock does not.

When a bond is selling at a premium, a bond callable at par will

have a YTC that is less than the YTM.

All of the following are true about GNMAs except

interest is paid semiannually

Bond prices are quoted as a percentage of

par value

For a bond selling at a discount, the yield to maturity will be

Higher than the nominal yield.

When discussing convertible debt securities, it would be incorrect to state that

Holders receive a higher interest rate.

An investor in the 28% income tax bracket is considering purchasing either an 8% municipal bond or a 10% corporate bond. Which of the following regarding the bonds is true?

The municipal yield is higher than the corporate yield on an after-tax basis. The tax-equivalent rate in this case is 0.08 ÷ 0.72 (100% − 28%) = 11.11%. In other words, a client in the 28% tax bracket would have to invest in a taxable bond that yields 11.11% to get the same after-tax return that the 8% tax-free bond offers.

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is

5% 36m/20m = $1.80 per share Current Yield = $1.80 / 36

Mitch purchased a 30-year bond for 97¾ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Mitch receives semiannual coupon payments and expects to hold the bond to maturity?

8.67% (Has to be higher than 8.5%)

Which of the following expressions describes the current yield of a bond?

Current Yield= Annual interest payment/ Current market price

If a customer buys a 6% bond maturing in eight years on a 7.33 basis, the price of the bond is

below par

Which of the following indicates a bond selling at a discount?

7% coupon yielding 7.5%

Regarding convertible debentures, one characteristic of which your clients should be aware of is that

Although they trade in line with the issuer's common stock, they are less volatile than the common shares.

All the following securities are issued at a discount except

CDs

An investment in which of the following would expose the investor to the greatest capital risk?

Common Stock

A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct?

Bond B will be selling at a greater premium than Bond A.

When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate?

Convertible

ABC's stock has paid a regular dividend every quarter for the past several years. If the price of the stock has remained the same over the past year but the dividend amount per share has increased, it may be concluded that ABC's

Current yield per share has increased

All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true except

GNMAs are considered to be the riskiest of the agency issues.

When an investor owns a convertible security where, upon conversion, the account value would remain the same, it is considered that the convertible and the common are selling at

Parity

What happens to outstanding fixed-income securities when interest rates decline?

Prices increase

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria?

TIPS

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that

The bond is selling at a discount.

Which of the following statements regarding corporate zero-coupon bonds is true?

The discount is in lieu of periodic interest payments.

What is the name of the bond document that states the issuer's obligation to pay back a specific amount of money on a specific date?

The indenture

Which of the following statements is true if a corporate bond is callable?

The issuing corporation has the option to redeem the bond before it matures.

A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why?

The municipal bond because its equivalent taxable yield is 6.60%. 100%-28% = 72% (4.75%/ 72% = 6.6%)

Which of the following best describes a Yankee bond?

U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim

ahead of the common stock and the preferred stock but after the bonds.

An investor owns a debenture convertible into 20 shares of the issuer's common stock. After a 2-for-1 stock split, the terms of the debenture provide for conversion into 40 shares. This is because the debenture has

an antidilution clause.