Series 65 unit 2

The minimum face amount of a negotiable CD is:

$100,000

A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of

- Current yield is determined by dividing the annual interest payment by the current market price of the bond ($50 ÷ $900 = 5.56%). Years to maturity is NOT a factor in calculating current yield. ($50 comes from the bond being set to 1000)

universal life insurance

- Universal life has flexible premiums. - Cash values can fluctuate and may even fall to zero.

Which of the following bonds would appreciate the most if interest rates fell?

30-year maturity, selling at a discount -The general rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. Furthermore, discounted bonds, with their lower coupon rates, have a longer duration than a bond selling at a premium and will respond more favorably to falling rates than will those premium bonds. Thus, the 30-year discounted bond will move faster than the others.

A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and interest payment to an investor. This payment will be

All interest payments made a MBS are taxed as ordinary income. Mortgage-backed securities may make principal and interest payments to investors, which would be partly taxed as ordinary income and partly a tax-free return of principal.

Nurturing growth of the enterprise would be the objective of which of the following types of investments?

Private Fund

The current yield on a bond with a coupon rate of 5.5% selling at 110 is

The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 x 5.5%) divided by $1,100 and that equals 5%.

Is the interest from a municipal bond exempt from federal tax?

YES

which is most commonly recommended to fund a child's college education

Zero-coupon Treasury bonds

The only real guarantee in a variable life policy is

the minimum death benefit will be the face amount of a scheduled (fixed) premium policy

If your customer wants to set aside $40,000 for when his child starts college, but does not want to endanger the principal, you should recommend

zero-coupon bonds backed by the U.S. Treasury. - Treasury Strips are backed by U.S so there is no chance of default. - Zero coupon offer no current income but appropriate here 100% return paid at a future date for college

Which of the following statements regarding convertible debentures is TRUE?

A conversion feature is a benefit to the debtholder. It allows the debtholder a choice to either continue holding the debt represented by the debenture or to convert it into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win/win situation. The win for the debtholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the debenture purchaser, that purchaser is willing to accept a lower interest rate on the debt (as compared to a nonconvertible debenture) and therefore giving the issuer a lower cost of capital. It is the debtholder, not the issuer who determines when and if to convert.

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least?

All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality. Treasury securities have higher quality than other debt securities due to the elimination of default risk. When market interest rates rise, bonds having higher coupons will decline less than bonds having lower coupons.

Programs allowing for the passes of gains and losses to investors include

S corps and direct participation programs allow you to but REITs DO NOT!**

An investor is looking to add some bonds to her portfolio. One of the bonds she is analyzing has a 3% coupon and the other a 6% coupon. Assuming both bonds have the same maturity date, a change in interest rates will have a more profound effect upon the market price of which bond?

The longer a bond's duration, the more its price is affected by changes to interest rate. When bonds have the same maturity, the one with the lowest coupon has the longest duration. Ratings have little or nothing to do with price changes caused by interest rate changes. So in this case its the one with the 3% coupon.

Secured vs. Unsecured Debt

Secured debt gets its name from the fact that some asset, or assets, of the issuer are pledged as collateral for the loan this usually results in lower interest rate